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The World Price Index

Released: April 14, 2015

Sterling remains overvalued but is undermined by UK election uncertainty

  • Start of year sterling rally ends
  • WPI data shows beneficial deflation
  • Energy, Food and Recreation Costs fall

Sterling Enters Turbulent Times
The latest set of World Price Index (WPI) data indicates that the United Kingdom Pound still remains overvalued against the US dollar by 10% in Purchasing Power Parity (PPP) terms, but this is being eroded by a number of factors that could push the relative value of the currency down in coming months.

The methodology behind the WPI involves collecting price data for a representative basket of goods across different countries. This allows the measurement of the real purchasing value of national currencies across the world in terms of their relative purchasing power against a comparable basket of goods in the US.

The chart opposite shows that from July 2014 until February 2015 Sterling and the Euro both followed a similar valuation path declining rapidly in PPP terms against the US$. In July 2014 the market exchange rate for sterling was US$1.71 against a WPI rate of US$1.39. The Euro was 0.74 as against a WPI rate (based on the WPI average of Germany, France, Italy and Spain) of 0.86. At these exchange rates the Euro was overvalued by 17% against the US$ in PPP terms while the £ was overvalued by 24%.
 

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