The Salary Calculator

Foreign exchange rates and their impact on goods and services in light of the pounds drop

by Madaline Dunn

In more bad news for the UK, last week, the pound fell again, following announcements by the Bank of England (BOE) that it would not extend emergency support. With the pound yo-yoing so dramatically many people are concerned about the wider impact of the pound’s drop in value and it’s likely you’ll have some questions.

At The Salary Calculator, we’ll walk you through:

• The current state of the pound
• What this means for consumers

The state of the pound

There are a number of different reasons behind the pound’s recent plummet, and although the new Prime Minister, Liz Truss, has been vocal about blaming the fallout from the Russia-Ukraine war, considerable blame rests with the announcement of the mini-budget.

As the news of Chancellor Kwasi Kwarteng’s economic plan spread, the pound dropped to record lows, and while it’s true to some extent, as Truss said, that “currencies are under pressure around the world,” the depreciation of the pound, to this extent, is unprecedented.

The pound fell sharply again after Andrew Bailey warned that the Bank of England would not extend its emergency intervention in financial markets. To help soften the blow, many had been advising Truss to do a complete U-turn on the mini-budget’s unfunded tax cuts – the International Monetary Fund, for example, stated that this would “change the trajectory” of interest rates. On Friday, it was announced by Truss that this U-turn would go ahead, alongside the firing of Kwarteng, which caused the pound to fluctuate once again.

What does the pound’s fall mean for consumers?

When it comes to the pound’s fall and its impact on exchange rates, consumers will feel the effect in that their money won’t go as far when paying for imported goods and services, such as oil. While oil has returned to pre-Ukraine war levels, due to oil being priced in dollars, for the time being, you’ll be paying more for topping up your car.

Speaking about oil’s price hike, Bestinvest’s Alice Haine says: “As with most major commodities, oil is priced in dollars which means filling up your car will be more expensive.” Adding: ‘The price consumers pay in the UK is still relatively high because of weakness in the pound.”

When it comes to food imports, while most people believe that around 50% of food is imported, some food analysts estimate that the UK actually imports much more, around 80% of its food. However, a significant portion of these food imports come from the EU, and considering, as Haine outlines, the Euro is down against the Dollar, the price increase will likely be less “dramatic” than oil’s price hike. That said, times will still be tough for importers, especially considering that the pound’s fall follows the challenges that came with Brexit, Covid, a global logistics crisis, rising energy bills and industrial action.

Although fewer people will be travelling abroad this Autumn/Winter, there are some that might be travelling for work or fancy a getaway when fewer people are holidaying. As an ABTA (Association of British Travel Agents) spokesperson told Euronews Travel, surprisingly, there’s still a lot of “pent up demand” for overseas travel after the last few years of travel restrictions, and due to customers deciding that holidays are “one of the last things they will cut back on when” looking to ease financial pressures. For those travelling within Europe, while activities and dining out won’t be affected as much, the plane ticket you purchase might be higher, due to aviation fuel and aircraft leases generally being priced in US dollars, and airlines outside the US having to pay more to refuel, something which is passed onto the customer. Travelling to the US, however, will be more expensive, as will trips to places such as Dubai and Barbados, as they also have their currencies pegged to the Dollar.

Tags: Bank of England, Economy, exchange rates, sterling