Rising inflation and weak Euro affect trade

05-23-2010 14:07

The cross-border trade by Northern Ireland retailers is likely to decrease. This is the result of increasing inflation in the United Kingdom and due to the declining Euro. Inflation in the UK reached the highest level since November 2008 last month. This was caused by increasing food costs and budget tax increases.

Consumer Prices Index

The Consumer Prices Index (CPI) inflated to 3.7% in April, which is the highest level in 17 months. The Office for National Statistics (ONS) had forecasted a 3.5% level. Europe’s Common Currency dropped to the lowest level in four years versus the US Dollar to $1.23. Additionally, the Euro declined versus the British Pound to £1.17.

Ireland

In the Republic of Ireland inflation is -2.5% against 3.7% in the UK. This is the largest difference ever. Ulster Bank economist Richard Ramsey believes that this gap increasingly affects Northern Ireland.
“Obviously this impacts North-South trade. Prices are dropping in the Republic of Ireland while they continue to climb in the United Kingdom and in Northern Ireland. The exchange rate also has its impact.”

Northern Ireland

Ramsey emphasized that deflation especially affects food and non-alcoholic beverage prices in Ireland. “Northern Ireland faces inflationary pressures, while Ireland sees continued deflation. In combination with the declining value of the Euro, this continues to diminish the price difference between Ireland and Northern Ireland. This difference prompted Irish citizens to shop in Northern Ireland in the last 18 months.”

Inflation

The increase in British inflation prompted BoE governor Mervyn King to contact chancellor George Osborne. King explained the UK chancellor in an open letter why inflation still exceeds the BoE’s target of 2%.

Retail Prices Index

The headline Retail Prices Index climbed to 5.3% last month, which is the highest reading since July 1991. Mortgage interest payments rose in April, in comparison to last year when lenders cut rate. The inflation data create pessimistic prospects for savers who try to generate a real return. A basis rate taxpayer has to gain 4.63% interest on its savings to prevent that the value of its money inflates in real terms.