UK inflation registers surprise fall in October to 0.9%

Posted on November 15, 2016

Britain’s headline inflation rate fell unexpectedly last month, pushed down by lower costs for clothing as price rises remained moderate despite the falling value of the pound.

After leaping to hit a surprise 1 per cent in September, annual inflation fell to 0.9 per cent in October, below the 1.1 per cent rise economists had forecast ahead of the release.

Core inflation, which strips out volatile elements such as energy and food, also fell to 1.2 to per cent from September’s 1.5 per cent according to figures from the Office for National Statistics.

UK inflation could climb towards 4 per cent next year on the back of a falling pound, according to some estimates, while the Bank of England expects consumer price rises to average 2.7 per cent over the next two years – its highest sustained inflation overshoot since 1997.

Commenting on October’s figures, the ONS said the weaker currency was boosting the price of goods leaving factories but had not yet made an impact on the headline inflation rate.

Input price inflation faced by UK factories accelerated to 12.2 per cent last month, compared to October 2015, higher than the 7.3 per cent climb registered in September.

Mike Prestwood at the ONS 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.

However, aside from fuel, there is no clear evidence that these pressures have so far fed through to the prices in shops.

In its latest quarterly outlook, the BoE hinted it was edging away from another interest rate cut this year as it raised its inflation forecasts stretching out to 2018.

Higher factory gate prices mean “the easing in inflation looks likely to be swiftly reversed in coming months” said Chris Williamson at IHS Markit.

“It’s therefore likely to be only a matter of time before price hikes in retailers’ supply chains start feeding through to the customer, as retailers seek to protect margins”, said Mr Williamson.

Despite last month’s slight fall in annual inflation, the “upward trend remains strong” said Samuel Tombs at Pantheon:

CPI inflation remains set to make big strides towards the 2 per cent target over the next three months, as the anniversary of sharp falls in motor fuel and food prices is reached.

Thereafter, sterling’s depreciation will begin to push inflation up sharply, utility companies will respond to the recent rise in wholesale energy prices by lifting consumer tariffs, and services inflation likely will continue to grind higher as firms grapple with big increases in minimum wages and non-wage labour costs.

Suren Thiru at the British Chambers of Commerce said: “The uncertainty over Brexit is likely to maintain the downward pressure on sterling’s value, and push prices higher over the next year”.

Speaking to MPs after the release, governor Mark Carney said that despite October’s soft reading “inflation is going to go up and that is the consequence of the very large depreciation in the exchange rate”.

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