The British pound dropped to an all-time low against the U.S. dollar early Monday morning, falling almost 5% to reach a record low of $1.0350. The drop is expected to put more strain on U.K. households already hard hit by surging inflation, particularly in regard to energy costs.
Year-over-year inflation in the U.K. stood at 9.9 percent as of August, down slightly from 10.1 percent in July.
Business Insider wrote that Monday’s British pound carnage could exacerbate the crisis even further. “When the pound is weak, that can drive up inflation. That’s because goods from other countries become more expensive, if they are priced in stronger currencies such as the dollar,” Business Insider reported.
Businesses must buy that other currency, meaning that surging inflation will force them to pay more for the same quantities of goods. The extra costs are then passed on to consumers.
A drop in value is expected to have a significant impact on the already hard-hit energy sector, where fuel imports are priced in dollars. Fuel products such as gasoline and diesel are priced in dollars and account for two of the U.K.’s largest imports.
The U.K. spent nearly 10 billion pounds ($10.7 billion) importing oil, natural gas, and other types of fuel last year, according to the Office of National Statistics. As of last week, the average price for a gallon of gasoline stood above £6 ($6.44), according to AA.
In addition, the U.K. also imports a substantial number of food products from abroad, according to government figures. Bank of England Governor previously Andrew Bailey warned in April to brace for “apocalyptic” rises in food prices.
Economic analysts are urging the Bank of England to aggressively raise interest rates to support the U.K. currency. The central bank’s policymakers aren’t scheduled to meet until November 3, but the BOE can hold an emergency gathering in exceptional circumstances, Business Insider reported.