Inflation concerns over removal of 1p and 2p coins "unfounded"

Lily Canter
23 August 2018
Image

Removing the 1p and 2p from circulation would not cause inflation according to analysts at the Bank of England.

Critics say that scrapping copper pennies would lead to price increases as items could potentially be rounded up to the nearest pound by retailers.

But experts argue that the impact on consumers would be minimal because prices would be rounded up on the final bill rather than on individual items. This has been the case in other countries that have removed their low denominations coins, such as Argentina or Australia.

Bank of England economic analysts Marilena Angeli and Jack Meaning say that even if individual prices were rounded on all payments, the evidence suggests there would be “no economically significant impact on inflation”.

While the government has not made any official announcement that the coins will be abolished, the blog has sparked further debate on the impact of removing them from circulation.

The analysts argue that due to the low percentage of cash payments in the UK – currently just 3% of all sales – the vast majority of payments would not be affected.

Rounding up or down to the nearest 5p would only apply to cash payments. Card or electronic payments would likely continue to charge the exact amount.

There is also clear evidence that the number of items sold at a price ending in .99 have reduced in recent years and now only account for just over 12% of all prices.

“This is mirrored by an increasing tendency for prices to end in round numbers and suggests that, over the past few years, there has been a declining proportion of items whose prices are likely to be rounded up if the 1p and 2p coins were abolished,” say Ms Angeli and Mr Meaning.

Lost down the back of the sofa

Consumers are also far less likely to spend their pennies, with a Treasury consultation document on cash and digital payments revealing that six out of every ten 1p and 2p coins are used just once before they drop out of circulation.

This mirrors the reduced production rates at the Royal Mint which manufactured half the amount of 1 and 2 pence coins in 2016-17 compared with the previous year.

Whether the low denomination coins will be removed remains to be seen but there is a precedent in the UK with the halfpenny being abolished in 1984.

Ms Angeli and Mr Meaning suggest that the same arguments made in the early 1980s around the inflationary impact of removing the tiny coin are now being made again but the evidence and UK price data suggests that these concerns remain “unfounded”.

Comments

In reply to by anonymous_stub (not verified)

There is an unmentioned aspect to this exercise. The Royal Mint changed the metal used for 'copper' coins in about 1991, going from a copper alloy to coated steel. Actual copper coins (particularly 2p) minted before the change are worth more for their copper content than the face value of the coins. I'd bet that a large amount of such older coins are being held out of circulation by those who know this. The BoE will be quietly hoping that abolishing these denominations might trick people into surrendering their metal. I'd never advocate melting down coinage - I believe it's illegal for ordinary people to melt down legal tender (even though the BoE has been melting down every single pre-1991 copper coin it gets back...) - but IF these denominations ceased to be legal tender, then would I be right in saying that law no longer applies? Just a thought.

In reply to by anonymous_stub (not verified)

The BoE are wrong, a retailer could not legally price an item at £0.99 because it will not be possible to pay £0.99 for it. I.e. tender £1.00 for the item and the retailer cannot give you £0.01 change. He/she would have no option but to give you £0.05 change and therefore the most likely scenario is that the item will increase in price to £1.00 and that is inflation of approximately 1% on that product. For completeness the other option is of course to reduce the price of the item to £0.95, which is not very likely.

In reply to by anonymous_stub (not verified)

At least it would put an end to the foolishness of price tags ending in .99 pence

In reply to by anonymous_stub (not verified)

I suspect the people who will be hit hardest by this are small local charities. Where I live we all have tins, bottles or jars that our coppers and 5p coins go in and when they're full the contents are sorted out and donated. How much is involved? I've no idea but our last pub clear out was the thick end of £40 and that had been collected in under a month.

In reply to by anonymous_stub (not verified)

I am sure it has been noticed by all and sundry that every time 'money' is tampered with in any way - going away from the old £sp system, Euro's being introduced etc - the man in the street is always worse off. Leave it alone.

In reply to by anonymous_stub (not verified)

I'm all in agreement to rounding up the shopping bill to the next whole pound but does the additional cost have to go to the retailer? Why not donate it to charity? There are thousands of charities that receive no government funding at all and even those that do still often struggle. Each individual retailer could have a charity of the month perhaps nominated by their customers from a choice of three local charities suggested by the retailer. This could be similar to the Tesco token scheme; but perhaps with an app to vote rather than the need for all shops to have one of those big bulky token collection points that Tesco have to put the tokens in. This would then include all shops even the smaller ones that have no room for a token type collection point. This would also ensure that those that were interested and wanted to vote could but those that did not want to for what-ever reason did not have to, Tokens would not be lost or taken home in error and as the tokens are made of plastic this would then not have a detrimental effect on the environment.

In reply to by anonymous_stub (not verified)

the bank of England what a shambles another company with one brain cell for many people.

In reply to by anonymous_stub (not verified)

So if I buy a small bottle of water priced at 18p will I be charged 15p or 20p, I bet it becomes 20p so that is inflation. It happened when the half penny went and when we changed over to decimal coinage. These coins should be retained, if you can't be bothered with them you ae welcome to put them in a charity box.

In reply to by anonymous_stub (not verified)

Really? Odd I have noticed a new trend. Two of my local supermarkets are raising prices in anticipation of the loss of the 1p, 2p and 5p coins. They have moved their prices up to whole pounds where relevant and to 10p's otherwise. They have also started an old one up again, reduce the quantity but charge the same.

Add new comment