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Worldwide Financial Zen International (Weak Pound Stoking Inflation)

Posted 22nd March 2010.

Zen International: The falling value of the British pound has raised concerns about the prospect of elevated inflationary pressures in the United Kingdom among several of the nine members of the Bank of Englands Monetary Policy Committee (MPC).

As sterling falls, the cost of importing goods and materials like oil and food rises as many of these imports are priced in US dollars and euros both of which have risen against the pound significantly.

Zen International analysts believe that the problems facing Britain will get worse before they get better and that country faces a period of stagflation. Stagflation refers to the economic condition where growth in GDP is static or minimal whilst prices rise.

Inflation surged to 3.5% in the month of January, an event which obliged the Governor of the Bank of England to write a letter to the Chancellor of the Exchequer, Alistair Darling, explaining why the rate had exceeded the Banks own target of 2%.

Zen International believes that although policymakers still expect inflation to fall back once upward pressure from the rise in VAT, higher oil prices and the past fall in sterling wear off, it is more likely that mounting concern over the political situation in the UK will continue to exert downward pressure on the currency.

This, the analysts suggest, could see inflation surge even higher with the need for higher interest rates becoming more urgent.