ANYBODY who works in financial markets, or who has ever visited an actual market, knows about the law of one price. Identical goods or assets must sell for the same price; if not, arbitrageurs will step in, buying the cheap ones and selling them on at a slightly higher price, targeting buyers who patronise the expensive providers. Eventually, cheap goods will be bid up and/or expensive ones pushed down, until identical items sell for identical prices. That’s why a pint of milk costs the same at Tesco, Sainsbury’s, Asda and Waitrose (49p, if you ask). There are, of course, caveats relating to information, transaction costs and other matters; but it’s a pretty powerful rule.
The same tends to apply across countries over time, as a note from Citigroup reminds us. When sterling tumbled on the foreign exchange markets in 2007-09, following the bursting of the bubble, consumer goods became significantly cheaper than those in the rest of the EU. A German tourist could have come to the UK, traded euros for pounds, bought lots of cheap goods and returned home happy. This is no longer possible: our endlessly above target rates of inflation, and higher prices for imported goods, mean that Britain is no longer a land of bargains for our European neighbours.
Such price shifts are hardly novel. Following the pound’s rise in 1996-2000, consumer goods sold in the UK became 14.5 per cent more expensive than the EU 15 average, according to Citigroup, fuelling a row about “rip-off Britain” and prompting much soul-searching (laughably, at the time, supporters of the UK’s membership of the single currency cited our higher prices as an excuse to ditch sterling).
But the stronger pound meant that importers were able to slash prices and grab market share. Prices tumbled in stores during the 2000s, handing consumers a windfall, limiting the rise in overall consumer prices and lulling the Bank of England’s monetary policy committee into a false sense of security. It thought that surging liquidity, money and credit was fine because overall consumer prices were subdued – but that was because the higher pound was allowing cheap Chinese goods to fly off the shelves.
In 2009, when the pound collapsed, goods prices in the UK ended up 10.4 per cent cheaper than in the rest of the EU 15 – in fact, prices here were the lowest in the EU 15 at market exchange rates. That didn’t last: importers were forced to put up prices to preserve their profitability, and the cost of imported goods rose sharply.
Combined with overall inflation and a partial recovery in sterling, consumer goods prices were back to being just 0.3 per cent above the EU 15 average last year – in other words, the law of one price had prevailed. There are two lessons: first, the upwards pressure on shopping baskets from imported goods is now over, with the entirety of sterling’s fall priced in; and second, currency movements always eventually feed back into either higher or lower prices for imports. One can’t devalue a country into prosperity, at least not in that way.
SOMETHING nasty is happening to the Chinese economy. Both of China’s manufacturing surveys fell in June, with the HSBC/Markit measure down from 49.2 to 48.2, the lowest since September. While the Shibor – the rate at which banks lend each other money in Shanghai – has fallen back, which is a relief, China’s mad credit bubble is close to bursting. Credit Suisse estimates Chinese property to be the most expensive in the world, with a home in Shanghai costing 22.3 times disposable income. Analysts are finally daring to question official data: other nations’ trade statistics suggest China’s trade surplus was close to zero in the first four months of the year, rather than the $61bn or so it claims. Hard landing, here we come.
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