What’s the link between Brexit and the price of a tin of Baked Beans? The short answer is money. That seemingly simple thing that the rich have lots of and the poor not so much, which actually turns out to be kinda confusing. For starters, take the Brexit vote. It happens and then the pound sterling loses value. Suddenly Britain’s currency is worth less in the world and it gets pricier to import goods, so businesses put their prices up to recoup the loss and the consumers end up having to pay more on everyday goods. Meanwhile, the Bank of England recently edged a little closer to raising interest rates, which would make it more expensive to borrow money, again making it harder for everyday folk to take out loans. But what does all this financial malark mean? Well, here’s an over-extended metaphor involving Monopoly to try to explain it.
You’ve got your typical game of monopoly with plenty of players, lots of streets to buy and a bank dishing out money. So far, so simple, but now imagine that the board gets bigger. As the game progresses so new streets are built and one player, Mr Top Hat, wants to build an epic new street full of shops, houses and hotels. Mr Top Hat doesn’t have enough cash under his mattress so he approaches the bank to take out a loan. Mr Bank is pretty excited by this new development and decides to issue the loan. Hurrah, Mr T-H has the money (the credit) but is also in debt to the bank because he’ll have to pay it back with interest. Mr T-H builds the street and it’s epic. Other players buy houses and hotels on the street and Mr T-H makes a bunch of money. He pays the bank back with interest and pockets a tidy profit. Now, the other players are so impressed by Mr T-H’s success that they start doing it too and take out loans to build streets with cool amenities on them. Mr Bank sets a favourable interest rate (i.e. making it easy to take out money) and things start booming. However, because the board is growing the money supply needs to grow as well and Mr Bank creates some more cash (just like that!). More money in the economy gets Mrs Supermarket excited and she puts her prices up meaning goods become more expensive. So Mx Average Jo suddenly has to spend more money on a tin of baked beans. This whole process of rising prices and falling purchasing power is called inflation.
The players keep nipping around the board and the board keeps growing in size, as does the amount of money in the game, so inflation keeps going up too. However, too much inflation is not a good thing so Mr Bank decides to increase interest rates to make it harder to borrow money. The point of doing this is to keep inflation rising at a steady and manageable rate. Of course, it’s alright for Mr Top Hot, who is very rich, but not so good for Mx Average Jo who will have to wait for another burst of growth to inspire a drop in interest rates. But the irony of this all is that whatever Mr Bank does inflation is always increasing and whether Mrs Supermarket puts her prices up if there’s more money in the economy or Mr Bank puts interest rates up because there’s too much money in the economy, the one who loses out is always Mx Average Jo. Economic growth and inflation are two sides of the same coin. Now, what about Brexit, fluctuating currencies and economic recessions? That’s Part 2 and involves an important new player, Mr Speculator.