This entry was posted on October 2, 2022 by Menzie Chinn.
Figure 1: PPI deflated genuine GBP/USD exchange rate (blue), and CPI deflated (tan), both in logs, 1973M01= 0. Down movements signify depreciation of the Pound. The PPI deflated rate declines the system root null at the 13% msl using the ADF test (6% for the unit root test).
Figure 1: PPI deflated genuine GBP/USD currency exchange rate (blue), and CPI deflated (tan), both in logs, 1973M01= 0. Down movements signify devaluation of the Pound. Sept values for PPI assumes ongoing decline at August rate. Bloomberg agreement for UK CPI; Cleveland Fed nowcast for United States CPI. ECRI defined recession peak-to-trough economic crisis dates shaded gray. Source: Fed via FRED, BLS, author, and onss calculations.
One way to take a look at the events of September is that its the 3rd consistent unfavorable regards to trade shock the pound has experienced in the past 15 years, the first being the Global Financial Crisis, and the second being Brexit. The down relocations in the PPI deflated real rate are more remarkable (in my opinion) because they reflect a wear and tear in the regards to trade of ostensibly tradable goods.
How do official analytical tests associate with this assertion. The PPI deflated rate declines the unit root null at the 13% msl using the ADF test (6% for the unit root test). That implies that PPP for traded goods/PPI is not highly evident. A Bai-Perron recursive structural break test recognizes breaks at 1987, 2000, and 2015. The 2015 break is close to the Brexit referendum.
For more conversation of PPP, etc, see this
The drop in the pound over the recently was significant. However even with the recovery in the currencys value to pre-mini-budget levels, the pound has been on a downward trend for the previous 6 years, in inflation changed terms.