Surprise inflation fall but big rise still expected

The UK's inflation rate, which most commentators expected to rise last month after hitting 1 per cent in September, registered a surprise fall to 0.9 per cent in October.

According to data on Tuesday from the Office for National Statistics (ONS), rises in the Consumer Price Index (CPI) caused by a hike in fuel prices, mainly as a result of the fall in the value of sterling against the dollar, were offset by falls in such items as clothing and footwear.The ONS said there was as yet "no clear evidence" that the plunge in the pound against other currencies in the wake of the EU referendum was resulting in an increase in shop prices.However, the ONS said the currency fall was having an effect on manufacturers' costs with the Producer Prices Index (PPI) showing total input prices rising 12.2 per cent in October after a 7.3 per cent increase in September. As a result, output prices rose 2.1 per cent last month.Mike Prestwood, ONS head of inflation, said, "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. However, aside from fuel, there is no clear evidence that these pressures have so far fed through to the prices in shops."

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Mark Carney, giving evidence to the House of Commons Treasury Committee on Tuesday, said that while inflation in October was lower than expected, he insisted inflation was going to rise in the months ahead as the weaker pound pushed up the price of imported goods.Tom Stevenson, investment director for personal investing at Fidelity International, commented, “The expected rise in inflation paused for breath today as higher fuel prices were offset by slower rises in the price of clothes and university fees and cheaper hotel stays.“Against all expectations, the CPI rose by just 0.9 per cent in the year to October, slightly lower than September’s increase. However, prices are still rising faster than at any time since late 2014. The rise in prices continues to be driven by sterling’s recent weakness which has raised the cost of imported fuel and food.“Consumers can expect UK inflation to continue rising into next year as the impact of the pound’s slide continues to be felt. The conventional wisdom is that the Bank of England’s 2 per cent inflation target will be left behind in 2017."Jeremy Cook, from currency exchange company World First, added, "By our estimates, it will be the early part of the New Year that sees the majority of the price rises. Retailers are some of the smartest companies out there and they know it would be suicide to hike prices now pre-Christmas."Of course, the tightness of budgets in the retail environment means that any price rises are going to be painful – and low-cost operators and discounters will be ready to pounce – but they will have to come or we will likely see additional seasonal and structural unemployment increases in 2017.”Chris Williamson, chief economist at IHS Markit, agreed that despite October's CPI fall, the trend over the coming months would be upwards as rising factory costs fed through to consumers."It's therefore likely to be only a matter of time before price hikes in retailers' supply chains start feeding through to the customer, as retailers seek to protect margins," he said."The concern is that consumers are driving the economy at the moment, and higher inflation is starting to eat into people's spending power, subduing consumer spending."Nick Dixon, investment director at Aegon, said the trajectory for interest rates was also upwards. "While slowing price growth may have come as a surprise to the markets, the days of low interest rates are numbered," he said."We're likely to see hawkish calls intensify among Bank of England officials in coming months. Despite the sluggish pace of inflation, the next 12 months are likely to see interest rates rise faster and higher than expected."

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