Understanding economics can be a dreary task, but, it doesn’t have to be. With all that is going on with the UK regarding the Brexit, the inflation rate, and the changes in house prices, it gets hard to keep track of what is happening to the currency. This is why in the following article we’ll explain the basic things you need to know about the relationship between the housing market, inflation, and the UK’s exchange rate.
● House Price Index
This index is extracted by the UK government using annual house price data to plot the price fluctuations that take place in the residential housing market over a specific period. Now, while the official HPI records of 2019 are to be released in May; we can already predict the results. In April 2018, the UK has recorded a 3.3% price increase from the previous year. Needless to say, the economy has not been in good shape ever since then which can only mean that we’re more likely to be seeing an increase in the house price index. The increase in prices, and the unstable state of the economy, have caused people to reduce their buying.
● UK Inflation Rate
There are several causes that have a huge part to play in the state of the UK’s inflation rate. The instability caused by the Brexit has resulted in people acting in a precautionary way; increasing their buying, just in case prices increase. Another thing is that if you take a look at the monthly exchange rates presented on https://www.currency-convertor.uk/monthly-average-exchange-rate, you’ll find that for the most part of 2019, the value of the GBP has decreased. Surprisingly, this decrease itself is considered a cause of inflation which, in turn results in a further decrease.
● How Both Factors Affect the Exchange Rate?
Simply put, both factors use different modes of action to either decrease the demand for the GBP as a currency, or increase its supply; thus, decreasing its value against other currencies. The increase in housing prices causes people to reduce spending on houses which is a local commodity. Instead, they start spending more on imported goods which leads importing companies to sell their local currency in exchange for more goods. On the other hand, the inflation rate increase means that people need to spend more sterling to get something they used to get for less; currency devaluation. So, as the GBP decreases in value and becomes more common in the market, its price decreases.
One thing you have to keep in mind throughout the article is that economics, as a field of study, is extremely fluid. While increased spending at some period may be healthy for the economy, at another time it can result in inflation. It also depends on the type of commodities the money is being spent on. However, what you need to know is that everything boils down to the forces of demand and supply. Inflation, prices, the housing market, it all goes back to how much are people willing and able to spend on it.