UK consumer inflation holds steady

Posted on September 13, 2016

©Bloomberg

The UK’s headline rate of consumer inflation held steady in August but there were further signs that price pressures were building for businesses.

Consumers have so far been largely insulated from the fall in the value of sterling since the vote to leave the EU, but the effects have been felt immediately by manufacturers.

    On the positive side, surveys have reported a notable boost to export orders. But for businesses without comprehensive hedging strategies, imports have become markedly more expensive.

    Data from the Office for National Statistics published on Tuesday showed that after falling for the past two years, the price of goods bought and sold by UK manufacturers rose for the second month in a row. The overall price of material and fuels bought by companies rose 7.6 per cent in the year to August, a notable increase from the 4.1 per cent rise in the year to July.

    Mike Prestwood, head of inflation at the ONS, said that while raw material costs were increasing owing to the falling value of the pound, there was “little sign” of these price increases feeding through to consumers.

    The consumer price index was up 0.6 per cent in the year to August, unchanged from July. The City consensus had been for a small increase but in the event a rise in food and travel costs was cancelled out by a fall in hotel prices.

    The retail price index, which is no longer a national statistic but is still used to update some investments, fell to 1.8 per cent in August, down from 1.9 per cent in the year to July.

    However, economists are near unanimous in expecting all inflation metrics to rise over the next year as the impact of sterling’s depreciation passes through.

    Martin Beck, senior economic adviser to the EY Item Club, said “the only way for inflation in the near future is up”.

    The concern for policymakers is that rising inflation will begin to squeeze household disposable incomes and cause spending to slow. Yet at the moment the signs are that households are prepared to spend. Retail sales data have been robust and separate ONS data published on Tuesday showed the pace of house price increases moderated only slightly after the Brexit vote.

    Average house prices in the UK increased by 8.3 per cent in the year to July, down from 9.7 per cent in the year to June. But many of these transactions would have been started before the vote and property agents report a general sense of caution in the market.

    Jonathan Hopper, managing director of property finding firm Garrington, said in many areas the market was in “limbo”, with a drop in transaction volumes helping keep prices high.

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