CPI inflation remains muted, for now - HL comment
Ben Brettell, Senior Economist, Hargreaves Lansdown:
Economists had been expecting inflation to rise for the third consecutive month in August, as retailers passed rising import costs on to consumers. However, the ONS data showed consumer price inflation remained at 0.6%. As yet the effect of the weaker pound on consumer prices appears muted.
Input prices faced by manufacturers rose 7.6% in the year to August 2016, compared with 4.1% a month earlier. This is the fastest rate since 2011. The ONS said this was largely due to a large fall in the index 12 months ago (driven by a plunge in crude oil), rather than the recent drop in sterling, but nevertheless it is clear businesses importing materials from abroad are facing significantly higher costs. These companies must choose whether to absorb the increase or pass it on to consumers. Assuming at least some will choose the latter route, this could lead to higher consumer prices down the line.
As such the effect of sterling’s depreciation will take time to feed through fully into the figures, as businesses gradually adjust to the new environment. Over the next few months existing inventories will be wound down and currency hedges put in place by supermarkets and other importers will gradually start to fall out of the equation. It is only then that the full impact will be seen.
Forecasts suggests the drop in sterling will ultimately add around five percentage points to the Consumer Prices Index, but it’s as yet unclear whether that will come via a gradual uptick in the inflation rate over a couple of years, or a shorter, sharper bout of inflation over the coming months. The Bank of England forecasts consumer price inflation will hit 2% this time next year.
Recent economic data releases suggest the economy is holding up well despite the vote to leave the EU. The picture will become slightly clearer this week with labour market statistics due out tomorrow, followed by retail sales data on Thursday, when the Bank of England is also expected to leave monetary policy unchanged.
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