Axing 1p and 2p coins would not push up inflation, say Bank of England economists

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Bank of England economists have waded into the debate over the future of 1p and 2p coins after claiming that scrapping coppers from circulation would not push up inflation.

In a Bank of England blog post on Wednesday, two analysts said their research and the “overwhelming weight of literature and experience” suggests that retiring 1p and 2p coins would have “no significant impact on prices”.

The authors – Marilena Angeli and Jack Meaning – argue fears over the rounding up of prices are overdone, given that doing away with low denomination coins would only affect cash payments, and even then would likely see prices rounded up at the total bill level, not individual items.

“Even if individual prices were rounded on all payments, analysis of UK price data suggests no economically significant impact on inflation,” they wrote.

They calculate that even if retailers round up all prices to the nearest 5p, inflation would only be pushed up by 0.07 percentage points.

“As inflation steadily erodes the purchasing power of low denomination coinage, the case for its removal becomes stronger,” according to the experts.

Their comments risk stoking further controversy on the subject, coming after the Treasury sparked a furore over the prospect of 1p and 2p coins being abolished earlier this year when it called for evidence on cash and digital payments in March.

The Treasury consultation pointed out that 60% of 1p and 2p coins are used just once before they drop out of circulation – often being thrown into jars or down the back of the sofa – while inflation is also steadily eroding the purchasing power of the penny.

But just a day after the review was announced, amid mounting fury over the possibility of the humble penny being axed, Downing Street moved swiftly to confirm there were no plans to do away with copper coins.

Among the fears raised over the move was the worry that it would see the cost of living increase due to price rounding.

“However, such arguments are flawed on a number of levels,” according to the Bank economists, who say their findings are backed up by a raft of international research.

They say the growing number of economies that have removed low denomination coins have introduced a system where price rounding is only applied to the final bill.

And the impact is lessened further given that rounding only applies to cash payments – which now make up just 3% of spending in the UK.

The analysts also highlight that price tags ending in 99p now only account for 12% of prices.

This means rounding up would be less of an issue if 1p and 2p coins were ditched, they said.

They concluded that worries over the inflationary effect of removing low denomination coins are “unfounded”.

It comes after figures in the latest annual report from the Royal Mint on Monday revealed production of 1p and 2p coins roughly halved in 2016-17 compared with the previous year.

Production of pennies fell from just under 500 million, to 288 million.

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