UK inflation falls to 0.9 per cent

UK inflation registered a surprise fall in October, although there were signs that the pressure on consumer prices is starting to build.

According to the latest data from the Office for National Statistics, the Consumer Prices Index (CPI) slipped to 0.9 per cent, from 1 per cent in September.

That was below the 1.1 per cent predicted by economists, who said sterling’s fall would push October’s CPI higher.

However, the ONS said factory gate prices and the costs of raw materials rose much faster in October.

Goods leaving factories rose by 2.1 per cent, faster than expected and the biggest increase since April 2012.

And costs faced by producers for raw materials and oil showed a record monthly jump in October, up by 4.6 per cent.

Liz Cameron, chief executive of Scottish Chambers of Commerce (SCC), said: “The unexpected fall in the rate of inflation may be some respite for Christmas shoppers but retailers are telling us that they still expect the low value of the pound to translate into higher shop prices, particularly when the new season stock arrives.

“Whilst the Bank of England is expecting inflation to peak at less than 3 per cent, the key will be the differential between prices and wage increases and what with might mean for consumer demand – a key factor in growing Scotland’s economy.

“That is why Chambers of Commerce will be looking for clear pro-business measures from the UK and Scottish Governments in the forthcoming UK Autumn Statement and Scottish Budget. Our Governments need to invest in skills and connectivity, whilst tackling the high cost of Business Rates, to promote growth and support hard working businesses.”

Bank of England governor Mark Carney told the Treasury Committee that “the thinking now is that inflation is going to go above target… We see more inflation coming through in 2017-18, and then a tail in 2019.”

Inflation has been below the Bank’s 2 per cent target for nearly three years. Last year it was zero, the lowest since comparable records began in 1950.

Andrew Sentance, senior economic adviser at PwC, said: “Food prices fell compared with last month, and this offset rises elsewhere, including higher fuel prices. Though the pound has fallen very sharply, it is taking some time for this to feed through into prices in the shops and online.

“But this respite for consumers will be short-lived. In the months ahead and next year, we should still see a significant increase in inflation reflecting higher import costs for manufacturers and retailers. The latest PwC projections suggest that CPI inflation should be between 2.5 and 3 per cent by the end of next year, much in line with the Bank of England’s latest forecast.

“This will squeeze the growth of consumer spending and reinforce the projected slowdown in economic growth next year arising from the uncertainty created by the EU referendum vote.”

Martin Beck, senior economic advisor to the EY ITEM Club, said: “The soft inflation reading in October was partly due to unusual seasonal movements in clothing prices and the diminishing impact of 2012’s introduction of a higher cap for university tuition fees. But there was also a surprisingly weak reading for food prices.

“However, we expect the October outturn to represent a brief hiatus in what is likely to be a steep upward trend in inflation rates over the coming year. In the near-term, base effects will continue to exert upward pressure, as last year’s sizeable declines in food, petrol and energy prices continue to drop out of the calculation.

“Further out, the impact of a weaker pound will be key. The producer prices data suggests that the depreciation is causing pressures to intensify further along the supply chain, with factory gate inflation reaching its highest rate since mid-2012. It is likely to take around a year for the maximum impact of this depreciation to be seen in consumer prices. Therefore, although today’s figures were weaker than expected, we still see CPI inflation getting back to the 2% target in early-2017 and then moving towards 3% later in 2017.”