Sterling and inflation

Quarterly Bulletin 1981 Q3
Published on 01 September 1981

An important factor behind the significant reduction in the rate of UK price inflation has been the rise in sterling. By mid-August, however, sterling had depreciated from its peak against the US dollar by over 25% and from its effective rate peak by over 10%. This note discusses the resulting upward pressure on UK prices. It disputes the view that sterling's movement against the dollar gives a better indication of the inflation effect than the movements in its effective exchange rate. The response of wages is very uncertain. This note suggests that, in the absence of any wage response, consumer prices could rise on account of depreciation by only one quarter of the fall in the effective rate after two years.

PDFSterling and inflation


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