Belfast Telegraph

'Day of reckoning ahead' for consumer spending as inflation reaches 1.6%

By Margaret Canning and PA

Consumer spending and economic growth face a "major wake-up call" from higher inflation in 2017, an economist has warned.

The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measure of inflation hit 1.6%, up from 1.2% in November, marking the highest level since July 2014 and higher than a forecast 1.4% rise.

Ulster Bank chief economist Richard Ramsey warned alarm bells over inflation would ring even louder during this year - and pointed to a 25% rise in Apple's App Store prices.

Mr Ramsey said: "Inflationary pressures stemming from rising import costs, due to sterling weakness, are expected to push consumer prices higher.

"Import costs rose by almost 17% year on year last month, the most since July 2011.

"Meanwhile, Apple announced that the fall in the pound will lead it to raise App Store prices by 25%."

Mr Ramsey predicted that inflation would reach 3.0% year-on-year in the next few months.

"This will erode consumers' disposable incomes, particularly for those experiencing benefit freezes and wage caps," he said.

"A wake-up call for inflation also means a wake-up call for consumer spending and economic growth. Watch this space."

Separate figures for the Producer Price Index showed that factory gate prices rose 2.7% year-on-year in December as manufacturers started to pass through higher input costs following the collapse of the pound.

Sterling increased on the news, to trade 1% higher at 1.218 versus the US dollar by mid-morning. Against the euro, it was up around 0.3% at 1.138.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, highlighted "unexpected strength" in the inflation figure, adding that CPI was likely to take "bigger upward strides over the coming months".

He said inflation was likely to increase by more than 2% in January, and to average 3% across 2017, as rising wholesale costs for goods such as food and fuel were passed on to consumers.

UK households are likely to be squeezed further by retailers, who have so far mitigated the fall in sterling through hedging practices that include buying dollars in advance, but who will be forced to raise prices as those positions expire, Mr Tombs claimed.

ONS head of inflation Mike Prestwood said rising air fares and food prices, in addition to a shallower fall in petrol prices compared with a year earlier, helped to push up inflation in December.

"This is the highest CPI has been for over two years, though the annual rate remains below the Bank of England's target and low by historical standards," Mr Prestwood said.

The jump in food prices was one of the biggest contributors to rising CPI, with climbing vegetable costs helping to push overall food prices up by 0.8% between November and December, having been flat a year earlier.

The 12-month rate for food prices was still negative, down 1%, but that marked its highest level since July 2014.

The ONS said sterling weakness was a factor in rising food prices, but not the sole contributor.

Renewed Brexit jitters sent the pound as low as 1.21 against the US dollar in December, a 19% drop from its pre-referendum high.

A 49% rise in the cost of air fares between November and December, compared with 46% a year earlier, contributed to a 2.9% jump in overall transport prices.

Belfast Telegraph