Killing Off Britain’s Pennies Wouldn't Trigger Inflation Jump

(Bloomberg) -- Britons say that if you look after the pennies, the pounds will look after themselves. But when it comes to maintaining the spending power of those pounds, new research shows that may not be true.

Scrapping the U.K.’s lowest value coins -- the 1 and 2 pence -- would have no economically significant impact on inflation, according to a post on the Bank of England’s staff blog published Wednesday.

Analysis by Marilena Angeli and Jack Meaning found that while businesses may opt to round up prices to avoid the need for pennies, that would most likely be applied at the total bill level rather than on individual items. It would also only affect cash transactions, which make up a low proportion of spending by value.

Even if individual prices were rounded on all payments, there would still be little impact, the researchers said. The prevalence of items prices ending in 99 pence has fallen to just over 12 percent, as retailers favor round numbers, reducing the number likely to be affected by the coins’ removal.

Britain’s smallest coins hit the spotlight earlier this year when Chancellor of the Exchequer Philip Hammond announced a consultation on their use, provoking a vehement media campaign against the idea of scrapping them and prompting a hasty denial by the Treasury that the coppers were in danger. The U.K. last eliminated a coin in 1984 -- the bronze halfpenny.

Even so, the 1 and 2 pence pieces seem to be dying out anyway, in part as inflation erodes their purchasing power and usefulness. The Royal Mint, which makes U.K. coins, says production roughly halved in 2016-17 compared to the previous year. The Treasury says six out of every ten are used just once before they drop out of circulation, with many ending up in coin jars or falling down the back of the sofa.

“As inflation steadily erodes the purchasing power of low denomination coinage, the case for its removal becomes stronger,” the BOE researchers said. “Our analysis, and the overwhelming weight of literature and experience, suggests it would have no significant impact on prices.”

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Zoe Schneeweiss

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