Sterling devalued both against the euro and the US dollars in 2008.
During the year, US inflation was 1% on average and UK inflation was 3.5% (Note). The inflation discrepancy is 3.4% whereas the change in exchange rate is 25%.
For the same period, average Euro zone inflation was 3.3% against the UK inflation of around 3.5%. The inflation discrepancy in this case is almost negligible at 0.2% whereas the change in the exchange rate is higher at 36%.
Although the theory is right in the sense that UK has higher inflation rate and therefore devaluation of its currency, it is not sufficient in explaining the significant differences in this case.
Note: Consumer price index is used for inflation.
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