Money (8)

The pound has fallen again, and the FTSE 100 is moving even closer to its record. But at what point does a fall in the pound start becoming counter-productive?

It’s an odd thing, but up until very recently, we were told that the pound was a lot like the UK’s share price. When it rose we were told all is well. When it fell we were told to brace ourselves. Now the pound is falling, we are told it is a reason to celebrate

Investors into the UK stock market have certainly been celebrating. The FTSE 100 closed at 7,074.34 yesterday. The all-time record closing price is 7,103.98, just 30 points away.

But the reason for the recent surges in the FTSE 100 are technical. As the pound falls, the earnings of overseas subsidiaries of firms listed on the index rise when converted into sterling. And the FTSE 100 has more than its fair share of companies with overseas subsidiaries.

But the fall in sterling is getting quite dramatic. There is a sweet spot. If the pound falls to a certain level, that is good, it helps exporters. But if it falls too far it can have a one off but quite sharp inflation effect, that in turn will hit households hard.

In 2008, sterling fell from around 1.27 euros to the pound before the finance crisis, to a low of 1.04 in January 2009, but it soon rose and from the middle of January right through to the middle of 2010, fluctuated between 1.08 and 1.15 euros the pound. Sterling is now back in that range.

The result of the fall in sterling after 2008, was that inflation rose around 18 months later and stayed high-ish for some time, rising to over 5% at the end of 2011. As a result, for a four-year period, wage growth was outstripped by inflation and the domestic economy was hit hard

Unless the pound picks up, we may well see a repeat of this.