With the pound remaining weak, UK retailers are likely to pass import costs on to consumers.
First it was the Marmite scare. A price dispute between Tesco and Unilever over the breakfast spread grabbed viral headlines in October 2016, worrying devoted fans that it might disappear from British supermarket shelves.
Ultimately, Marmite remained in stock. But if recent trends continue, Britain’s weakened pound, whose value plunged following the Brexit vote, may lead to future declines in buying power for UK consumers. In October, Unilever’s chief financial officer Graeme Pitkethly told investors on an earnings call that “prices should start to increase to cover the cost of imported goods due to weaker sterling.”
Later, on the eve of the US election, The Guardian and MySupermarket.com released research showing that price increases on a basket of Unilever goods had increased an average of 5.7% following the Brexit vote, although spokespeople for Sainsbury’s and Morrisons played down a Brexit connection in statements to the newspaper.
While the term “austerity” describes a specific set of UK government policies to shrink deficits, in the UK following the Great Recession it came to stand in more abstractly for a sense of economic futility, as growth sputtered. With exchange rates spelling declines in buying power, a similar suggestion of belt-tightening may begin to attach itself to the idea of “Brexit” as well.
Examples abound. In November 2016, Toblerone began shrinking the size of its famous triangular chocolate bars in the UK to cover lost revenue caused by higher prices of imported chocolate. The cost to print books jumped from £1.50 ($1.86) per unit to over £3 ($3.72) per unit between June and November, Sam Jordison, codirector of Norwich-based publishing company Galley Beggar Press, told CNBC, adding that the company had been in danger of folding as a result.
Apple raised UK retail prices 20% at the end of October 2016, making MacBooks in the United Kingdom about $275 more expensive than in the United States. Microsoft has announced a similar plan to “harmonize prices” with the EU. The likely implication is that, absent salary increases, British consumers’ buying power will decline next year and onwards, especially as talk of a “hard Brexit” continues to spook traders.
Following Trump’s election, the value of the pound rallied slightly. But with major Brexit announcements expected in the months ahead, the gains could prove fleeting. “The pound’s drop is likely to be a series of spaced-out depreciations, with the trigger for weakness being each piece of new information on the economic sacrifice that the UK government is willing to take on the path to Brexit,” Koon Chow, macro and forex strategists at UBP, told the Financial Times in October.
Watch this dynamic closely to see how consumer mindsets react to a weakened pound in 2017.