Pound plunge means even higher prices for UK consumers, says McKinsey

British consumers are likely to face a further hike in prices of clothing and homewares following the pound's plunge against the dollar, consultants McKinsey said on Tuesday.

The majority of UK retail's clothing and homewares are bought from Asia in dollars. The pound touched an all-time low of $1.0327 on Monday, sharply raising the costs of imports.

“With cost of goods being such a high proportion of the cost base of a company then the extent to which if you have that denominated in the dollar then it’s a pretty material effect,” Anita Balchandani, leader of McKinsey's consumer industries and apparel, fashion, and luxury work in EMEA, told reporters when asked about the impact on consumer prices.

She said the hit to retailers, and ultimately consumers, will depend on how they have hedged their currency exposure.

McKinsey economist Tera Allas said many retailers will not be buying dollars at spot prices.

"They will have some contract terms that allow them to smooth out those costs as well as potentially have hedged their currencies," she said.

UK retailers the John Lewis Partnership and Marks & Spencer (M&S) both adopt hedging to protect themselves from currency shifts.

“The sharp drop in the pound is stark, however we have a comprehensive hedging programme in place to deal with such foreign exchange exposures and this has mitigated any immediate impact on the partnership," said a John Lewis spokesperson said.

M&S said about 75% of its clothing is purchased in dollars. It typically hedges for about 15 months, so is covered for its 2022-23 financial year and a good proportion of 2023-24.

Primark owner AB Foods warned earlier this month that the appreciation of the dollar will dent profits in its 2022-23 year. It has, however, pledged to limit further price increases next year.