Inflation rises in wake of Brexit vote

The annual rate of CPI hit 0.6 per cent in July, up from 0.5 per cent in June - and analysts predict further increases due to post-referendum sterling fall

Economics Editor

Tuesday 16 August 2016 09:27 BST

Alcoholic drink prices pushed up overall inflation in July (PA)

Consumer price inflation picked up in the wake of the UK’s Brexit vote, hitting its highest rate since November 2014.

The Office for National Statistics said the annual rate of CPI inflation was 0.6 per cent, up from 0.5 per cent in June and slightly higher than City of London analysts had been expecting.

Inflation returning

A separate ONS measure of "factory gate" output inflation rose at an annual rate of 0.3 per cent in July, the biggest increase since June 2014, and breaking two years of declines.

Factory input prices, including materials and fuels, jumped by 4.3 per cent year on year, the first increase since September 2013.

This suggests the record fall in sterling in the wake of the June referendum vote is already pushing up the import costs of domestic manufacturers, which is likely to feed through into higher UK consumer prices in the coming months.

Input costs on the up

Samuel Tombs of Pantheon said he expected the consumer price inflation rate to hit 3 per cent next year, above the Bank of England's official 2 per cent target.

"Inflation’s pick-up ... will gain strong momentum in 2017, when sterling’s depreciation will boost core goods inflation" he said.

The data instantly sent the pound up around half a cent against the dollar to $1.2988, although most analysts still expect the Bank of England to cut interest rates again later this year.

“Today’s numbers are unlikely to unseat the Bank of England’s resolve in regards to using monetary policy to try to mitigate some of the negative economic impact from the Brexit shock,” said Andy Scott of HiFX.

Earlier this month the Bank cut its base rate to 0.25 per cent and unveiled a new £170bn programme of monetary stimulus.

Bank of England on Brexit

The ONS said the main drivers of the increase in the consumer price inflation rate in July were rising prices of motor fuels, alcoholic drinks and accommodation services.

"It looks probable that consumer purchasing power will be significantly diluted over the coming months as inflation trends higher and earnings growth is limited" said Howard Archer of IHS Global Insight.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

nito100

6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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“Companies may well look to clamp down on workers’ pay as they strive to save costs in a more difficult environment and as imported input prices are lifted by the weakened pound.”

Despite the CPI rate up-tick, the ONS measure of “core” inflation, which strips out relatively volatile energy and food prices, eased from 1.4 per cent to 1.3 per cent in July.

The ONS's latest house price index report today showed average prices rose 8.7 per cent in the year to June, up from 8.5 per cent in the year to May.

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