Inflation has jumped to the highest rate for two-and-a-half years, hitting 1.6% as the pound’s sharp drop since the Brexit vote continues to push up costs in the UK.
Official figures for December showed air fares, food prices and fuel all helped to drive the rise from 1.2% in November. The December rate, as measured on the consumer prices index (CPI), was the highest since July 2014 and higher than forecasts for 1.4% in a Reuters poll of economists.
The increase fanned concerns about a squeeze on living standards this year and economists said inflation would continue to climb much higher, leaving households worse off in real terms.
The worries stem from sterling’s drop against other currencies since the vote to leave the EU last summer. A weaker pound has raised the costs of imports such as food and fuel, and businesses are starting to pass that on to consumers. The pound has come under more pressure in recent days, dropping below $1.20 at one point, ahead of Theresa May’s speech on the Brexit process on Tuesday.
Conor D’Arcy, a policy analyst at the Resolution Foundation thinktank, said the latest inflation figures showed the ultra-low price rises that consumers have benefitted from in recent years were “well and truly over”.
“It will be years until we see the overall economic impact of Brexit, but the one dead cert in 2017 is rising inflation fuelled by a sharp fall in the pound. With nominal pay only expected to rise by 2.4% in 2017, the risk is we see a fresh pay squeeze with rising prices eating up all pay growth by the end of the year.”
The head of inflation at the Office for National Statistics, Mike Prestwood, said that while inflation was higher in December it was still below the Bank of England’s 2% target.
“Rising airfares and food prices, along with petrol prices falling less than last December, all helped to push up the rate of inflation. Rising raw material costs also continued to push up the prices of goods leaving factories,” he said.
The pound is down almost 20% against the dollar since the referendum, and the pressure on import costs has already sparked some high profile price tussles between suppliers and retailers, such as the row over Marmite last year.
Apple said on Tuesday that it was raising prices on its UK app store by almost 25% to reflect sterling’s sharp depreciation. The new prices will roll out over the next week, giving customers a short window to beat the price increase.
Underscoring the pressures firms face, ONS figures published alongside the inflation update showed another rise in factory costs. The prices of imported materials and fuels were the largest driver, largely on the back of the pound’s depreciation and a recovery in global oil prices, statisticians said.
Prices paid by factories for materials and energy rose by 15.8% in December on a year ago, the biggest jump since September 2011. Factory gate prices rose 2.7%, their fastest annual rise since March 2012.
The pickup in inflation follows the Bank of England view that the pound’s sharp drop since the Brexit vote is making imports to the UK more expensive and that firms will pass some of their higher costs on to consumers. Some economists expect inflation to rise to around 3% by the end of this year.
The Bank has said that rise would make life harder for consumers in 2017, as wages fail to keep pace with price rises, squeezing family budgets against a backdrop of slowing economic growth.
Businesses are also bracing for tougher conditions. The manufacturers’ organisation EEF said there was an “ever increasing squeeze on manufacturers from rising input costs”.
It’s senior economist, George Nikolaidis, said: “Any respite is unlikely during 2017 as increased input costs will continue to bite into profit margins in the year ahead.
“Manufacturers will employ a range of strategies to counter this drag but, with some of these costs already being passed on to consumers as CPI inflation rose to a two-year high, worries about the strength of household spending this year look to be well justified.”
With the UK economy largely reliant on consumers to drive growth, the Treasury has sought to highlight its efforts to support household incomes.
Commenting on the inflation figures, a spokeswoman said: “The government is committed to helping hard-working people keep more of what they earn and to supporting households with the cost of living.
“Increases to the personal allowance have reduced tax bills for some of the lowest earners by £1,000 a year, we are increasing the ’national living wage’ and have frozen fuel duty for seven years running.”
The TUC said people were already going into this latest bout of Brexit uncertainty and inflation on a weak footing.
“Working people are still £20 a week worse off than they were before the last financial crisis, and now rising prices are hitting their pay packets again,” said the TUC’s general secretary, Frances O’Grady.
“Signs that the UK will leave the single market are reducing confidence in the British economy and the falling pound looks likely to keep pushing up prices on everyday goods this year.
“The prime minister’s plan for Brexit [on Tuesday] must make sure that wages keep rising, as well as protecting jobs and rights, so that working people don’t pay the price for the decision to leave the EU.”
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