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Inflation tipped to reach two-year high in new figures

Published 13/11/2016

Mark Carney has predicted sharp price rises
Mark Carney has predicted sharp price rises

Inflation is expected to hit a two-year high when official figures for October are published on Tuesday.

The Consumer Price Index (CPI) measure of inflation is forecast to have reached 1.2% in October, up from 1% in September and 0.6% in August.

Economists are predicting that a jump in petrol and diesel prices will push up the cost of living, as stronger oil prices make filling up at the pump pricier.

Sterling's near 20% slump against the US dollar and 15% fall against the euro since the EU referendum result is also expected to start feeding through to prices, with services firms and manufacturers passing on higher import costs.

The latest manufacturing PMI report for October said the pound's collapse had triggered the steepest rise in purchasing costs in the survey's 25-year history.

Howard Archer, chief UK and European economist at IHS Global Insight, is predicting CPI to "trend markedly higher over the coming months" as the impact of sterling's weakness is felt.

He is forecasting inflation to reach its 2% target in the first quarter of next year, before rising to 3% in the latter part of 2017 and peaking at around 3.5% in early 2018.

Bank of England governor Mark Carney said earlier this month that Britons should expect sharply higher costs as the Bank's latest forecast showed inflation shooting up to 2.7% next year.

However, Mr Archer said there was potential for CPI to be pegged back by a number of factors, including fluctuations in the oil price.

"While Brent oil traded at a year high of 53.73 US dollars per barrel in mid-October, it has since fallen back to currently trade around 46 US dollars per barrel.

"Meanwhile, commodity prices are also seen firming only gradually. More fundamentally, markedly weakening UK economic activity over the coming months and softening labour markets should limit domestic price pressures."

The Office for National Statistics (ONS) said there was "no explicit evidence" in September that the plunge in the value of the pound was pushing up the price of consumer goods.

It said upward pressure in September came from a jump in clothing and footwear price tags - especially women's clothes - with garments rising 6% month-on-month , compared to a 3.3% rise over the same period last year.

However, food prices remained under pressure, dropping 0.3% between August and September, compared with a 0.1% rise last year.

Prices at supermarket check-outs have continued to fall as Britain's Big Four grocers remain engaged in a price war following the rise of German discounters Aldi and Lidl.

But the potential for food price hikes came into sharp focus in October when Tesco and Unilever became locked in a Mexican stand-off over the cost of key products, before the dispute was resolved.

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 10% price rise following the collapse of sterling.

The preferred official measure of UK inflation is set to change from next March to include housing costs and council tax.

The ONS said it will switch from the Consumer Prices Index (CPI) currently used as the central measure of inflation to CPIH.

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From Belfast Telegraph