UK inflation slips unexpectedly but big rises ahead

British inflation slipped unexpectedly last month but factory gate prices shot up at the fastest pace in years after sterling’s Brexit slump, spelling higher prices for consumers in the year ahead.

Consumer prices rose 0.9 per cent compared with a year ago, the Office for National Statistics (ONS) said on Tuesday, below economists’ expectation for a 1.1 per cent annual rise. But prices for goods leaving factories rose by 2.1 per cent, faster than expected and the biggest increase since April 2012. Costs faced by producers for raw material and oil showed a record monthly jump in October, leaping by 4.6 per cent.

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,” ONS statistician Mike Prestwood said.

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

Earlier this month the Bank of England forecast that inflation would rise to about 2.7 per cent around this time next year, as sterling’s big fall after Britain’s vote to leave the EU pushes up the cost of imports.

With wages only expected to grow more slowly, many households are likely to face a squeeze in their living standards next year.

The pound’s fall – down 16 per cent against the US currency and about 11 per cent against the euro – has left suppliers and retailers battling for profits as imported goods become more expensive.

British inflation has been below the Bank of England’s 2 per cent target for nearly three years and last year it was zero, the lowest since comparable records began in 1950.

BoE governor Mark Carney has said the central bank could tolerate some overshoot against its inflation target, to help accommodate economic growth and employment. But earlier this month it kept interest rates on hold, despite having signalled a cut only months earlier.

Retail price inflation – tracked by British inflation-linked government bonds – remained at 2.0 per cent.

British government bond yields have risen sharply rising inflation expectations spurred by the pound’s plunge and more recently, bets that president-elect Donald Trump’s spending plans would boost prices globally.

An ONS measure of core consumer price inflation – which strips out changes in the price of energy, food, alcohol and tobacco – slipped back to 1.2 per cent in October from 1.5 percent. Economists had expected a smaller fall to 1.4 per cent.

Clothing prices and university tuition fees pushed down on the headline rate of inflation last month, but prices paid by consumers for fuel rose at the fastest pace since April 2012.

The ONS also released figures for September house prices which showed an 7.7 per cent annual rise across the United Kingdom as a whole, unchanged from August’s rate.

Prices in London alone picked up a bit of speed, rising by 10.9 percent, compared with 10.3 per cent in August.

Reuters