Monday, Dec 14, 2009

Export pricing

FT: Exporters raise profit margins as pound declines

Devaluation of sterling has not led to expansion of the export sector as manufacturers have increased their profit margin instead. This is relevant to the UK inflation debate, because the BoE use the output gap to determine interest rates. Should domestic companies, when faced with increasing demand (whenever that is), borrow and expand using cheap surplus labour (the output gap) then we expand and recover. However, the alternative is to reject the expensive financing costs of expansion and instead raise prices, in which case inflation. Thus far, UK companies focused on exports have chosen price increases (maintaining euro prices despite 20% off) over expanding market share through expansion. Given the uncertainty around debt servicing costs Labour borrowing make this trend more likely.

Posted by stillthinking @ 09:46 AM (946 views)
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