Inflation on the Sterling Pound and Its Impact on Tesco
Recently, the term inflation has become very common in economics as almost every country and society in the world was hit by an increase in the general prices of goods and services over the last four years. Inflation is the term used to refer to this general rise in the cost of living over a given period, which is usually a shorter time than expected in an ideal economy (Boyes, W. J., and Melvin, 2010). In addition, inflation implies that the currency at that particular time will absolutely decrease in its value, as each unit of money will buy lesser quantities or qualities of goods and services than the normal (Levi, 2008). In 2007, the first sign of inflation was detected in the United States of America, and soon, this spread worldwide, with some nations like Greece being hardly hit by this effect. Companies felt the effect as the value of money reduced greatly. While the people’s purchasing power reduced, they resolved to cut on domestic costs in order to ensure that they satisfy the most prioritized needs (Madura, 2009). This implies that some companies felt the effect than others, and thus profitability reduced (Boyes, W. J., and Melvin, 2010). In general, the world economy was adversely affected. Of most important of the affects of inflation on the general economy is its effect on the prices of general consumer goods such as food substances. Every aspect of inflation results into an increased price of consumer goods, thus companies that specialize in consumer goods and services are the most affected by inflation. It is arguable that the recent worldwide inflation affected the major organizations like Tesco more than any other companies in the world did (Levi, 2008).
The sterling pound, being the strongest currency in the world today, was not spared by the 2007-2010 inflation. Just as the dollar and the euro, the sterling pound faced low purchasing power as consumer goods and services in Britain and the entire Europe increased rapidly, with an accompanying loss of currency value. Tesco is the second largest retail chain in the world after the American Wal-Mart, based in the United Kingdom but with branches internationally, Tesco must have felt the effect of inflation, and thus it is worth discussing the effects of inflation using Tesco and the British Pound as an example.
The effect of inflation on the pound
The United Kingdom reported inflation between 2008 and 2010. The world economic recession was prevalent in euro zone, and thus the United Kingdom could not escape. The exchange rate in the United Kingdom faced a tremendous effect due to increased demand for imports while there was surplus of currency in the market, but which fetched a decreased purchasing power (Levi, 2008). In 2008, the pound reached an all time low period of $1.8 in exchange with the American pound. This was a 6% fall in the currency values, which prompted the government to cut interests rates (Boyes, W. J., and Melvin, 2010). In December 2007, when the initial signs of a world economic recession were first being felt, the sterling pound fell by about 6%, from a high $2.10 to $1.96 exchange value (Boyes, W. J., and Melvin, 2010). The pound’s purchasing power reduced greatly at this point (Boyes, W. J., and Melvin, 2010). This means that the devaluation tariff on everything imported into the United Kingdom increased by the 6% figure (Boyes, W. J., and Melvin, 2010). In the nation, several imports vital for the economy were affected, ranging from fuel to manufactured goods, food and other stuffs (Boyes, W. J., and Melvin, 2010). The loss of purchasing power for the pound meant that consequently, the people’s purchasing power was decreasing significantly and in an almost equal rate as the inflation and loss the exchange values of the pound. In the United Kingdom, the cost of consumer goods rose rapidly between December 2007 and December 2010. As result, this phenomenon has some deflationary factors on the process of calculating the core inflation. When compared with the United States dollar, the pound was still strong, given that America experienced a greater effect of economic regression that the united kingdom. However, the exchange rates were comparable. After only six months of inflation, the pounds purchasing power had fallen again by an all time factor of 5.7% (Boyes, W. J., and Melvin, 2010). While the economic experts argued that the effect could eventually solve itself, the reality was that it could not act as a brake of demand as expected. This is because the benchmark prices of consumer goods and services as well as all imports were constantly rising with time. This was also being magnified by the falling rate of the pound in addition to the consumer goods, the prices of energy and material costs. This implies that the cost of transportation of goods and services within the local, market was also affected, given that the fuel industry in United Kingdom heavily depends on the importation of petroleum from Asia and Africa (Boyes, W. J., and Melvin, 2010). When compared to the euro, the sterling pound weakened by a large percentage between 2007 and January 2011. Despite this, euro also weakened due to the greater inflation and its effects in some nations than others within the European Union economic zone (Madura, 2009). For example, by the end of 2010, Greece was the most affected nation in the region, where other Europe nations as and the United States of America had to fuel in some resources to aid the ailing economy of Greece.
The effect of inflation and the falling pound on the economy: the case of Tesco
As the consumer goods and services faced rising prices, retailers in the United Kingdom had the worst period of trade between 2007 and 2009, although this varied with month’s surplus as the law of demands and supply determined the market prices of goods services (Humby, Hunt, and Phillips, 2009). The massive changes of prices from the low to the highest affected large retailers, which meant all the goods they dealt with, were being affected each day (Boyes, W. J., and Melvin, 2010). Retailers also faced a problem of low sales due to consumers’ tendency of cutting on the expenditure of some goods and increasing the volume of some other goods. This also means that some good were in high demand than others, creating an unusual imbalance of sales, a factor that had not been predicted earlier (Boyes, W. J., and Melvin, 2010).
Tesco, being the largest retailer in the United Kingdom and Europe and the second in the world, was one of the most affected companies in the United Kingdom. In addition, being a large-scale retailer, the above factors equally affected Tesco Corporation. By midyear 2008, Tesco had reported that the prices of vital goods in the British market had risen by at least 3 percent (Madura, 2009). In addition, due to the reduced purchasing power of the pound, Tesco found it very challenging in dealing with a low value currency under a high-priced domestic market. The company was forced to reduce the prices of its 7,500 products by the end of year 2008 (Boyes, W. J., and Melvin, 2010). This required an investment because it was an initiative to contain the rogue prices in a low-income period, at which most customers were concerned of the increased prices. In addition, this initiative was an intention to retain its customers was found wandering between retailers to decide which one offered the most affordable prices of goods. Consumers in the country valued prices than quantity especially at a time almost every good and service was fetching high prices at low quantities (Levi, 2008).
Tesco also faced the problem of increased demand for imported goods under a declining value of currency (Humby, Hunt, and Phillips, 2009). As the sterling pound reduced in its international exchange value, so cost of exports rapidly increased (Madura, 2009). This has a direct effect on the suppliers to Tesco Corporation. Suppliers, especially on the international market, were willing to supply the company with the goods it required at constant prices, but this could not be so because the cost of exportation and the taxation fee had increased rapidly for the three years (Humby, Hunt, and Phillips, 2009). In addition, suppliers were facing an increased price of raw materials both on the international market and within the United Kingdom. These two factors meant that the retailer was forced to purchase goods at high prices while in the local market it was struggling to keep up with the consumer demands for better prices (Humby, Hunt, and Phillips, 2009).
In conclusion, the inflation rate affected the exchange rate for the pound in the international and local markets. This in turn affected the prices of gods and services as the cost of raw materials increased. The cost of imports increased with the increasing rate of depreciation of the sterling pound, and the cost of consumer goods and services increased rapidly (Levi, 2008). All these factors culminated into the increased prices of retailer goods, which is the most important negative effect on large retailer chains like Tesco in the United Kingdom.
Boyes, W. J., and Melvin, M. 2010. Fundamentals of Economics. Mason, OH: Cengage Learning.
Humby, C., Hunt, T., and Phillips, T. 2009. Scoring points: how Tesco is winning customer loyalty. London: Kogan Page Publishers.
Levi, M. D. 2008. International finance. London: Taylor & Francis.
Madura, J. 2009. International Financial Management. Mason, OH: Cengage Learning.