Sterling’s Slide May Inflate Costs of Next Shirts to Barr’s Soda
Higher clothing prices for U.K. shoppers and increased costs for British drink makers may be among the consequences of sterling’s slide against the dollar and euro, according to Next Plc (NXT) and A.G. Barr Plc. (BAG)
Next, the U.K.’s second-largest fashion retailer, said yesterday that it expects to raise prices next year should the pound remain near current rates against the dollar. Sterling’s weakness is “the biggest risk” to the cost of production, A.G. Barr, the maker of Irn-Bru, said separately.
The pound has fallen 4.5 percent this year, the second- worst performance after the yen, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The decline came amid speculation that the central bank would debase the currency by expanding its asset-purchase program from the current target of 375 billion pounds ($569 billion) to prevent the economy from slipping to its third recession in five years.
“If the pound remains at its current rate of exchange against the dollar, we would expect our prices to rise in 2014,” Next said in a statement. Sterling’s decline will have “very little impact” on Next’s prices this year because the Leicester, England-based retailer extended its hedge against the dollar in anticipation of increased currency volatility, Chief Executive Officer Simon Wolfson said in a phone interview.
“The currency market had been quite volatile and we’re not in the business of gaining on currency so we hedged out the risk,” Wolfson said. “We took a view four or five months ago that we should push our cover further, so we are covered out on the dollar for the rest of this year at more than $1.58.”
Sterling has dropped 6.7 percent against the dollar this year, reaching $1.4832 on March 12, the weakest level since June 2010. It was at $1.5174 at 7:38 p.m. in London yesterday. A weaker pound pushes up Next’s costs because the company pays in dollars for goods it gets from suppliers outside the U.K.
A.G. Barr, based in Cumbernauld, Scotland, said that the pound’s weakness is the main threat to its expectation of reduced input cost inflation this year. Still, the maker of the Rockstar energy drink has “appropriate levels of cover in place” for the year ahead, it said in a statement.
The U.K. currency advanced on March 20 after the publication of the minutes of the Bank of England’s March 7 meeting showed some policy makers said more easing may cause an “unwarranted depreciation of sterling” and damage the credibility of their commitment to keep prices in check. U.K. Chancellor of the Exchequer George Osborne kept the inflation target at 2 percent during his budget speech the same day, even as he gave policy makers more flexibility.
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