15 October 2009

BBC Churnalism

Churnalism (n) - the practice of turning a press release into published copy without ever going through the journalist's brain.

Here is another example from the BBC: Pound hit by falling UK inflation. The BBC tries to link the fall in inflation with the fall in sterling, as if the first has caused the second.

"This is bad news for the pound," Duncan Higgins, senior analyst at Caxton FX, is quoted as saying. "The CPI figures will weigh heavily on the UK currency and will continue to discourage investment."

Anyone who has ever opened an economics textbook knows that low inflation, relative to inflation elsewhere, tends to push up the currency.

It works like this. Imagine there are just two currencies, pounds used in Britain and FX used in RoW. If inflation is 1% in Britain and 3% in RoW then 100 pounds will be worth 99 pounds next year while 100FX will be worth 97FX (roughly). So 1 pound will be worth more FX next year than now. The pound should rise.

By the way, the falling pound is good news not bad in the current circumstances. It is adding to demand and will help to reduce the current account deficit.

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