Teaching activity

Exchange Rates and Inflation: The Impact of Brexit on Business Costs

Jim Riley

6th November 2016

Bad news for fish finger-loving, crisp munching, Marmite-craving students and teachers. The significant fall in the value of the Pound compared with the Euro and Dollar is starting to create cost pressures on manufacturers who are looking to pass these onto retailers and (possibly) consumers.

This article from the Guardian is packed with A Level Business concepts - how many can you spot?

The business impacts of Brexit (positive and negative) will take time to become apparent. However, the most significant short-term impact has been via a sharp fall in the value of the Pound exchange rate against major currencies such as the Euro and Dollar.

A weaker pound, if sustained, is likely to result in:

  • Imports becoming more expensive;
  • Exports becoming cheaper in international markets (i.e. more price competitive)

So whilst UK manufacturers and other businesses trying to sell overseas should benefit from a lower exchange rate, those relying on imported goods and services (or which use inputs priced in overseas currencies) are starting to suffer from rising costs.

Imagine a UK-based manufacturer who buys a key raw ingredient which is priced in US Dollars (as most commodities are).

$10,000 of those raw materials when the exchange rate is £1 = $1.50 costs the manufacturer £6,667

However, if these exchange rate falls (weakens) to, say £1 = $1.25, then the raw material cost increases:

$10,000 of those raw materials when the exchange rate is £1 = $1.25 costs the manufacturer £8,000.

Can these rising costs be passed onto retailers? It comes down to the nature of competition in the market - which is why Porter's Five Forces Model and other concepts such as price elasticity of demand are so relevant here.

The major retailers have already demonstrated that they will fight hard. Much, as always, comes down the relative bargaining power of suppliers v customers.

Might we see retailers look to expand their own-label ranges if branded consumer goods products are rising in price?

Jim Riley

Jim co-founded tutor2u alongside his twin brother Geoff! Jim is a well-known Business writer and presenter as well as being one of the UK's leading educational technology entrepreneurs.

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