ANNUAL UK consumer prices index inflation surged by more than expected last month to its highest rate since summer 2014, official figures show, with economists highlighting the impact of sterling weakness following the Brexit vote.
The Office for National Statistics said yesterday that annual CPI inflation, which was at 0.3 per cent in May, had surged from 1.2 per cent in November to 1.6 per cent in December. The consensus forecast among economists was that inflation would have risen to 1.4 per cent last month, and the actual December reading was the highest since July 2014.
Scottish Chambers of Commerce was among those to highlight the likelihood that annual CPI inflation would soon surge above the two per cent target set for the Bank of England by the Treasury.
Liz Cameron, chief executive of Scottish Chambers, said: “Inflation is a concern for business as it can damage profitability and suppress growth in consumer demand, which has, to date, been one of the principal drivers of growth in our economy.”
The ONS cited upward contributions to the annual inflation rate between November and December from food prices, and transport costs, as air fares leapt by more than a year earlier.
Food prices rose by 0.8 per cent between November and December, having been unchanged between the same two months of 2015.
The ONS noted that, between November and December, the “majority of the broad groups of goods and services made an upward contribution to the change in the CPI 12-month rate”.
Howard Archer, chief UK economist at IHS Markit, said: “It is increasingly evident that sterling’s weakness is increasingly feeding through to cause retailers, services companies and manufacturers to lift their prices, or reduce the sizes of products - notably in the case of food items.”
Mr Archer said IHS Markit sees annual CPI inflation moving above its two per cent target rate during the first quarter, before rising to three per cent later this year and peaking around 3.3 per cent in early 2018.
Highlighting the squeeze on household incomes, he added: “It looks inevitable that consumer purchasing power will deteriorate markedly over the coming months as inflation moves appreciably higher and earnings growth is limited. Companies will highly likely look to clamp down on workers’ pay as they strive to save costs in a more difficult environment and as their imported input prices are lifted by the sharply weakened pound.
“Meanwhile, a likely softening labour market and consumer uncertainties will dilute workers’ ability and willingness to push for higher pay awards despite rising inflation. The odds look stacked in favour of inflation moving above earnings growth during 2017.”
Richard Lim, chief executive at consultancy Retail Economics, said: “Rising food inflation will be one of the areas families feel the pinch first and with many households ‘just about managing’, discretionary spending power will come under intense pressure - especially for the least affluent. Indeed, we forecast inflation to rise to three per cent in 2017, which is expected to plunge real earnings into reverse by late summer.”
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