NEWS

Pound Exchange Rate Fluctuation Could Prompt Five Percent Inflation, Justin King Says

Former retail boss also predicts one big brand will fail.

23/11/2016 09:28 | Updated 23 November 2016

The former CEO of Sainsbury’s has warned food prices could rise by at least five percent in the coming year, as inflation swells amid post-Brexit currency fluctuations.

Justin King told Newsnight that consumers should prepare to see considerably higher prices on products produced outside of the UK.

King said: “Something around 40 to 50 percent of what we buy in the shops is sourced abroad in currency other than the pound.

BBC
Justin King was the boss of Sainsbury's between 2004 and 2014

“With the current rates of exchange we can expect that to be around 10 percent more expensive in a years time.

“If that’s about half of what we buy, that means something of the order of five percent inflation.”

There are signs price rises are already filtering through to supermarket shelves.

In October, supermarket giant Tesco was at the centre of a price row with Marmite manufacturer Unilever. 

Unilever was believed to have demanded a 10 percent price rise due to the falling value of the pound against the dollar and euro, and halted deliveries to Tesco when the supermarket refused.

It is believed the two firms reached a compromise slightly below the original 10 percent demand.

Bloomberg
How the pound has performed against the US dollar this year, according to Bloomberg

Recounting his experience as head of the supermarket during the 2008-09 financial crisis, King said that the effect of economic turmoil on consumer confidence can take years to come about.

“I think back to the financial crisis and there was a lot of conversation about why we didn’t immediately see the effects on the consumer,” he said. “It was 2010 when consumers changed the way they shopped. That’s the timeline we are talking about.”

The pound remains down around 15 percent against the US dollar since June’s EU referendum.

Neil Hall / Reuters
Food prices could rise by five percent, the former boss of Sainsbury's said

Speculation of a so-called ‘hard Brexit’ led to sterling reaching a 31-year low in October.

As a currency’s value lowers, inflation can be expected to rise.

According to Bloomberg, UK inflation accelerated last month at the fastest pace for two years.

Barclays said on Monday that inflation in one year’s time would rise faster than at any time since 2011.

Rui Vieira/PA Archive
King warned that a big retailer could be at risk of failure in the future

The Bank of England forecast this month that consumer price inflation will rise to 2.7 percent in a year’s time, according to Reuters.

But King’s prediction of five percent inflation runs even higher than these figures.

King, who left Sainsbury’s in 2014 and is now vice chairman of a venture capital firm, also hinted that a big name retailer could fail in the near future.

While unable to say which specific retailer might be at risk, King said that those stores able to hold back price rises from customers will be best placed in the market.

“It will become clear overtime who the winners and losers are,” he said.

5 Things You Buy That Are About To Become More Expensive

  • Fresh produce
    Artemis via Getty Images
    Fresh produce like British apples are more at risk of inflation than other goods thanks to their shorter route to market - for example, the fuel used to transport them is becoming more expensive, according to the IFS.
  • Marmite, and the rest
    Chris Radburn/PA Wire
    The high-profile row between Unilever and Tesco highlights the current pressure on prices. It's not clear what deal was struck, but it's likely to be a compromise on the original demand of a 10% increase on Marmite, Pot Noodle and PG Tips, according to Mintel Retail.
  • Imported foods
    Daniele Carotenuto Photography via Getty Images
    Imported goods like coffee have risen in price by 12% in recent months, Sarah Hewin of Standard Chartered said. Increasing costs of raw materials look set to challenge manufacturers.
  • Clothing
    Newscast/AP
    The cost of clothing is likely to increase over the next year, with Next predicting a rise of around 5% - while retailers have bought next season's clobber, the future is less certain.
  • Furniture
    Laurence Dutton via Getty Images
    While furniture has a longer supply chain, firms like Ercol in Buckinghamshire are preparing to tinker with prices as the cost of raw materials like metal and wood increases.
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