The pound’s fall over the past week has been dramatic. But even with the currency’s value restored to pre-mini-budget levels, the pound has been on a downward trend over the past six years, in inflation-adjusted terms.
Figure 1: GBP/USD real exchange rate deflated PPI (blue) and CPI deflated (tan), both in logarithms, 1973M01=0. Downward movements denote a depreciation of the pound. The September values for the PPI assume a continued decline at the August rate. Bloomberg Consensus for UK CPI; Cleveland Fed Nowcast for US CPI. ECRI has defined the recession dates from the peak to the trough of the recession as shaded. Source: Fed via FRED, BLS, ONS and author’s calculations.
One way to look at the events of September is that it is the third persistent negative terms of trade shock the pound has suffered in the past 15 years, the first being the global financial crisis and the second being Brexit. . The downward movements of the deflated real PPI rate are more remarkable (in my opinion) because they reflect a deterioration in the terms of trade of ostensibly tradable goods.
How do formal statistical tests relate to this claim. The PPI deflated rate rejects the zero unit root at 13% msl using the ADF test (6% for the unit root test). This means that the PPP for traded goods/PPI is not very obvious. A recursive Bai-Perron structural break test identifies breaks in 1987, 2000 and 2015. The 2015 break is close to the Brexit referendum.
For more information on PPP, etc., see this.