Inflation fall to 0.9% takes analysts by surprise

Posted on November 15, 2016

Inflation fell in October, according to the latest official figures, defying expectations that the weaker pound would cause it to accelerate.

The consumer prices index produced by the Office for National Statistics showed a 0.9 per cent rise in prices since October last year. In September, the year-on-year figure was 1 per cent. Despite the fall last month, inflation is still higher than it has been since late 2014 when oil prices began to fall.

The prices of the inputs used by manufacturers rose, because the effects of lower oil prices dropped out of the calculations and import costs increased. There was also an increase in the “factory gate prices” that are paid by retailers and distributors for manufactured goods.

The data indicate that while there is significant inflationary pressure on manufacturers and retailers from the falling pound and the waning impact of lower oil prices, retailers are, for the moment, not passing this on to their customers.

The ONS said inflation had slowed because the price of clothing and university tuition fees both rose at a slower pace than in 2015. The biggest factor that was driving costs up was the rising price of motor fuels, it said.

Mark Carney, governor of the Bank of England, said: “Inflation was lower than we expected” but added, “I would not take a steer from the October numbers … inflation is going to go up.”

Input prices paid by manufacturers rose 12.2 per cent, faster than the 7.3 per cent figure for September.

This increase was partly because of a 26.7 per cent increase in the cost of crude oil — which is usually priced in dollars — and partly caused by an 11 per cent increase in the cost of imported parts and equipment, the biggest rise since March 2009.

Mike Prestwood, ONS head of inflation, said: “After initially pushing up the prices of raw materials, the recent fall in the value of the pound is now starting to boost the price of goods leaving factories as well.”

Factory gate prices increased 2.1 per cent compared with a year ago, up from 1.3 per cent in September. The biggest increase was in the petroleum products category.

The measure of “core” output prices, which excludes the volatile categories of food, drinks, tobacco and petroleum, increased 1.9 per cent. This was the biggest rise for more than four years.

“Aside from fuel, there is no clear evidence that these pressures have so far fed through to the prices in shops,” said Mr Prestwood.

Supermarkets have so far been reluctant to raise prices and risk losing market share. Many companies also have arrangements in place to compensate for the falls in the value of the pound.

“Going into the EU referendum our data suggested that our average corporate client was hedged for about five months and therefore those hedges are likely coming to an end in the next few weeks,” said Jeremy Cook, chief economist at foreign exchange company World First.

Separate data published on Tuesday by the ONS showed that UK house prices had risen 7.7 per cent in the year to September.

This was the same pace of increase as in August but lower than the 8 per cent increase in July and 9.3 per cent increase in June.

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