THE BLOG
19/03/2013 09:35 GMT | Updated 18/05/2013 06:12 BST

Currency War Hits the High Street

If you need to find any evidence of the impact of the UK's economic problems, you really don't have to go too far. My food shop is the place where I personally have felt the pinch most profoundly, as inflation has played havoc with the price of my weekly trip to the supermarket.

If you need to find any evidence of the impact of the UK's economic problems, you really don't have to go too far. My food shop is the place where I personally have felt the pinch most profoundly, as inflation has played havoc with the price of my weekly trip to the supermarket.

Recently we found out that inflation expectations in the UK had moved up to levels not seen since September 2008. This is on the basis that investors expect further quantitative easing (QE) from the Bank of England to once again boost the UK economy, while the collapse of sterling since the beginning of the year has caused our imports to become more expensive.

Like many other central banks around the world, since the financial crisis the Bank of England has used loose monetary policy, via the control of interest rates and the use of QE (or the threat of it in any case), in an attempt to engineer growth.

Whilst the theory goes that currency devaluation should help to make a country's exports more appealing to foreign buyers, there are clear implications for the general public. The primary effect of currency devaluation on the individual is that imported goods become a lot more expensive. In the UK we import a large amount of our food, fuel and machinery from abroad - tomatoes from Morocco, oil from the Middle East, tools from Mexico, the list goes on.

However, it does mean that alongside the oil, food and machinery that form our major imports we are also importing inflation on every boat, truck and airplane that arrives at our docks.

Inflation in itself is not a bad thing for an economy and is considerably more helpful than its 'brother' deflation. Increases in prices and the erosion of the purchasing power of money leads consumers to buy products and services sooner rather than later as they know that, in real terms, the longer they wait the more expensive they will become.

This differs from deflation which sees prices continually falling - which sounds like a great thing - until consumers decide to hold off on purchases in the belief that the goods will be even cheaper next month, and cheaper still later in the year. You then have a scenario where nobody buys anything apart from the bare essentials, and the economy grinds to halt.

The key comes in the relationship between prices and wages. The higher inflation that the Bank of England will force upon the UK populace by devaluing the pound and increasing import prices will be made more painful by the ongoing stagnation in UK wages. If wages are moving 3.5% higher and inflation sits at 2% then people in real and nominal terms are getting richer. The situation we have at the moment is that prices are increasing by 3% but wages are only increasing by 1.5% and so, in real terms, we are getting poorer by 1.5%.

This is the real impact of the 'currency war' that everyone keeps harping on about. While they may have the best intentions, the Bank of England, much like the majority of the world's central banks, are cranking up the pressure on households by continuing to pursue a policy of competitive currency devaluation. You only have to pop to your local supermarket to find the evidence of the real impact of this on-going 'fiscal conflict'.