Sterling Collapses, Buyers Face Price Rises And Tough Negotiations

The UK currency continued its post-Brexit vote decline last week. It has fallen some 15% since the June 23rd vote (and was already down on the year). It is now trading at $1.25 against the dollar and €1.11 against the Euro. At Heathrow last week, some currency exchanges were offering less than 1 euro per pound.

You can certainly justify this in terms of the economic uncertainty of Brexit, a new and unproven Prim Minister and so on. But you can also make a case that this is a serious over-reaction. Particularly when we look at the other major currencies, it is far from clear that their outlook is quite so positive.

In the US we have a presidential race that will end up with either some pretty "socialist" measures from Ms Clinton or who knows what from Mr Trump. Neither seem very keen on free trade and you would think that some of the pre-election rhetoric on both sides in terms of policies would damage the US economy if ever implemented.

For the Eurozone, the issues are even bigger. Deutsche Bank is in danger of collapse, there are still huge debts in southern Europe, growth is slow, countries like France continue to be unfriendly to business and wealth creators, and the rise of nationalism in the eastern European  countries threatens the European Union consensus on a number of issues. The referendum in Italy in a few weeks time could throw that country into more political turmoil.

And of course none of the Euro countries has the power to do anything about it individually, locked into the Euro and EU policies. On the other hand,  the UK government could at least do something directly about the decline of the pound immediately if it wanted to with a rise in interest rates.

So we'll see what happens sin the medium term, but in the short term, businesses, individuals and  procurement people in the UK are going to be facing real inflationary pressures. Some are obvious; products or services priced generally in $ or € are going to be significantly more expensive in sterling terms. There are other less obvious drivers too.

For instance, both footballers from other countries and US lawyers working in London will be looking for big pay rises if they are paid in sterling. They will translate their income into their home currency and see a big fall which they will want to be addressed. It will be more difficult for normal businesses to attract staff from outside the UK; and British workers may be more tempted by the idea of working abroad (that is ironic given the Brexit vote).

Those pressures will come through to businesses as suppliers demanding price increases. There are no magic solutions here; each negotiation will have to be based on the competitive and power situation between the parties. But procurement needs to be prepared for these discussions. They are happening already; and will get more common over the next few months.

And suppliers are not going to be coming in looking for just the couple of percent increases that we've perhaps got used to in recent times. These are going to be double-digit increases proposed in many cases - a real test for procurement people who have got used to the low inflation environment over the last ten years or more.

Get your negotiation boots on, buyers - you're going to need them!

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