UK inflation is expected to have jumped to a near two-year high last month even before sterling’s latest slump has had an impact amid Brexit price hike concerns.
The Consumer Price Index measure of inflation is forecast to reach 0.9 per cent in September, after stalling at 0.6 per cent in both July and August.
A hike in the cost of petrol and the rising cost of hotel bookings are expected to put the main upward pressure on the cost of living, with economists pencilling in CPI to hit its highest level since November 2014.
Pumped: A hike in the cost of petrol and the rising cost of hotel bookings are expected to put the main upward pressure UK CPI, which is seen hitting its highest level since November 2014
Howard Archer, chief UK and European economist at IHS Markit said: ‘Inflation is expected to have been lifted in September by higher petrol prices and by some services companies and manufacturers raising their prices as a consequence of increased input costs resulting from sterling’s overall substantial weakening.’
While sterling’s sharp drop against the dollar and the euro since June’s vote to leave the European Union is expected to boost export growth, the move will also ramp up the cost of imported goods putting pressure on suppliers to hike prices to recoup increased costs.
The pound hit a 31-year low against the dollar at around $1.15 earlier this month following a 6 per cent ‘flash crash’ caused by fears over a possible ‘hard Brexit’.
However, Mr Archer added: ‘September’s rise in inflation may have been limited by softer food prices. Specifically, the British Retail Consortium reported that the year-on-year fall in food prices in shops widened to a record 1.3 per cent in September from 1.1 per cent in August and 0.8 per cent in July.’
All eyes will especially be on food prices, with the impact of sterling’s fall having come into sharp focus last week after Tesco and Unilever’s Mexican stand-off over a potential 10 per cent price hike on key products.
Britain’s biggest supermarket was left grappling with a shortage of store cupboard staples – including Marmite, Pot Noodle and Persil – after reportedly refusing to bow to Unilever’s demands for a price rise following the collapse in sterling.
Unilever later said the dispute had been resolved, but warned that consumers would still have to stomach more pain in the New Year.
A group of former supermarket bosses said in the run-up to the EU referendum that grocery prices would rocket in the event of Brexit, dealing a devastating blow to the economy.
Marmitegate: The impact of sterling’s fall on prices came into sharp focus last week after Tesco and Unilever’s Mexican stand-off over a potential 10 per cent hike on key products
Fresh warnings were also made today by former deputy prime minister Nick Clegg who said consumers face ‘inevitable’ price rises on food and drink if Britain leaves the single market.
Mr Clegg, who has been appointed Lib Dem EU spokesman by party leader Tim Farron, said that ‘hard Brexit’ – in which the UK leaves the single market and customs union and trades under World Trade Organisation rules – would create ‘turmoil’ in Britain’s food and drink industry.
He said grocery bills will have to bear the knock-on costs of ‘whopping’ tariffs on imported foods imposed if the UK leaves the European single market, with a 59 per cent levy on beef, 38 per cent on chocolate, 40 per cent on New Zealand lamb and 14 per cent on Chilean wine.
Kathleen Brooks, research director at City Index, said rising prices could put the squeeze on the profitability of the UK’s ‘Big Four’ grocers.
‘Tesco may absorb price increases rather than pass them on to their customers, which could further squeeze Tesco’s margins, and may impact the future profitability of the firm.’
Costs: Bank of England governor Mark Carney said last Friday that the bank was willing to allow inflation to run ‘a bit’ higher than its 2 per cent target if it boosted economic growth
Looking at tomorrow’s inflation numbers, she added: ‘We think that the risk is for an upside surprise, and annual CPI could breach the 1 per cent mark for September, while the market expects a reading of 0.9 per cent.
‘If prices rise as we expect, then the (Bank’s) Monetary Policy Committee’s 2 per cent inflation target (is likely) to be breached at some point in first quarter of 2017.’
Bank of England governor Mark Carney said last Friday that the bank was willing to allow inflation to run ‘a bit’ higher than its 2 per cent target if it safeguarded jobs and boosted economic growth.
However, influential think-tank EY Item Club warned today that rising levels of inflation will apply the brakes to the UK economy in the years to come.
Its latest report, the EY Item Club said inflation is expected to surge to 2.6 per cent next year and 1.8 per cent in 2018, causing consumer spending – the main engine of Britain’s economic growth in recent years – to slump to 0.5 per cent and 0.9 per cent respectively.
Howard Archer expects UK consumer price inflation to reach 3 per cent by end-2017/early-2018 and says ‘the upside risks to this forecast are rising.’