Brexit latest: Consumer inflation rate unchanged in August but producer input prices rising fast

Consumer prices rose 0.6 per cent in the year to August, unchanged from July. But producer input prices jumped by 7.6 per cent

Ben Chu
Economics Editor
Tuesday 13 September 2016 09:28
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Airfares saw a price hike in the month of August
Airfares saw a price hike in the month of August

The rate of annual consumer price inflation was unchanged in August on the previous month, undershooting City analysts’s expectations of a pick up in the wake of the Brexit vote and the plunge in the value of the pound.

The Consumer Price Index was up 0.6 per cent on a year earlier last month according to the Office for National Statistics, the same rate of increase seen in July.

Analysts had pencilled in a 0.7 per cent growth reading, reflecting the impact of sterling’s 10 per cent fall against the dollar on import prices.

Price growth still subdued

Core inflation – which strips out volatile energy and food prices – was 1.3 per cent, flat on the July rate and lower than the 1.4 per cent predicted.

The news helped to send sterling down by around a three quarters of a cent against the dollar to $1.3258 as traders likely increased bets on another rate cut from the Bank of England in the face of relatively subdued inflation.

Last month the central bank had expected prices to rise to almost 1 per cent by September.

However, there were clear signs of the pound’s impact on prices with producer input prices rising by 7.6 per cent year on year, accelerating from the 4.1 per cent rate in July according to the ONS and hitting the fastest rate of growth since December 2011.

Producer output prices (known as factory gate prices) were up 0.8 per cent on a year earlier, up from 0.3 per cent in July and the biggest increase since January 2014.

On the up

Analysts said these price increases would ultimately be passed on to consumers.

“Given the level of competitive pressures faced by many firms, an element of these higher costs will be absorbed in lower corporate profit margins. But consumers will also have to bear some of the brunt,” said Martin Beck of the EY ITEM Club.

There were also tentative indications of the impact of the Brexit vote in house prices, with the annual rate of growth in average prices moderating to 8.3 per cent in July, down from 9.7 per cent in the year to June according to the ONS.

House price growth moderation

ONS

“I think today’s reading is a lesson that patience is a virtue,” said Alan Clarke of Scotiabank.

“It is only two months since the Brexit vote. It takes much longer than that for the impact of currency weakness to feed through to end customer prices.”

Mark Carney announces interest rate cut

James Knightley of ING said consumer price inflation would likely come close to 3 per cent by the end of next year.

The ONS said the August CPI rate was pushed up by higher prices for food and air fares, with the latter up by 13.9 per cent in August since July on the back of higher costs on European routes.

But this was counterbalanced by falls in hotel accommodation and smaller increases in alcohol and clothing than a year earlier.

The Bank of England cut interest rates to 0.25 per cent last month to support the economy in the wake of the Brexit vote even though the central bank expects inflation to return back to its official 2 per cent target by the first quarter of 2018 and to rise to 2.4 per cent by the end of its three year forecast period.

Analysts said the Bank was likely to “look through” this pick-up in inflation and might well cut rates again later this year to just 0.1 per cent.

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