UK inflation unexpectedly slipped last month but the Brexit-hit pound caused a sharp jump in manufacturing costs, signalling price rises are on the horizon for consumers.
The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation eased to 0.9 per cent in October, down from 1 per cent the previous month.
It looks inevitable that consumer purchasing power will deteriorate markedly over the coming monthsHoward Archer
Economists had been expecting a higher figure of 1.1 per cent, but CPI eased back last month after smaller hikes in the cost of clothing and education.
The ONS said there was “no clear evidence” that the plunge in the value of the pound since the EU referendum result was bumping up shop prices.
However, there were signs that the currency fall was ramping up costs for manufacturers, with the producer prices index (PPI) showing total input prices jumping by 12.2 per cent in October, compared to a 7.3 per cent rise in September.
The pound’s weakness also helped push up output prices to 2.1 per cent last month, from 1.3 per cent in September, the ONS said.
It comes as the latest PMI report for the manufacturing industry showed sterling’s near 20 per cent slump against the US dollar and 15 per cent fall against the euro since the Brexit vote had triggered the steepest rise in purchasing costs in the survey’s 25-year history.
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.”
The retail prices index (RPI) – a wider measure of inflation that includes housing costs – was 2 per cent in October, unchanged from September.
The pound, which was already lower ahead of the data, weakened further as the lower-than-expected CPI figure signalled there would be less pressure on the Bank of England to curb rising inflation. Sterling fell 0.6 per cent to $1.24 and 1.1 per cent to €1.15.
The ONS said the biggest downward impact on CPI in October came from clothing and footwear, where the price of garments – especially women’s outerwear – rose just 0.2 per cent between September and October, compared with a 2.3 per cent jump a year earlier.
The cost of education was also dragging down the cost of living, with overall charges climbing 2 per cent across September and October in contrast to a 3.6 per cent rise over the same period in 2015.
Food and non-alcoholic beverages made a small downward impact, with non-alcoholic drinks dropping 3.2 per cent between September and October after coming in unchanged over the same two months a year ago.
Overall, food prices fell 0.2 per cent last month, compared to a 0.5 per cent drop over the same period last year.
The largest upward pressure on prices came from motor fuels, which climbed 2.3 per cent between September and October after falling 0.9 per cent between the two months in 2015.
The ONS said: “Fuel prices tend to reflect movements in oil prices and part of the increase in oil prices in 2016 can be explained by depreciation of sterling against the US dollar.”
The price of petrol rose 2.6p a litre to 113.8p, while the cost of diesel rose 2.7p a litre to 116p.
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Bank Governor Mark Carney said earlier this month that Britons should expect sharply higher costs as the Bank’s latest forecast showed inflation shooting up to 2.7 per cent next year.
Howard Archer, chief UK and European economist at IHS Global Insight, said October’s dip in CPI was likely to be a “very brief respite” as last month’s rise in producer input and output costs pointed to price pressures in the supply chain.
“It looks inevitable that consumer purchasing power will deteriorate markedly over the coming months as inflation moves appreciably higher and earnings growth is limited,” he said.
“Companies will highly likely look to clamp down on workers’ pay as they strive to save costs in a more difficult environment and as their imported input prices are lifted by the sharply weakened pound.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The decline in inflation in October, after its big jump to 1 per cent in September from 0.6 per cent in August, mainly reflects volatility in pricing a year ago and does not imply that the relationship between sterling and inflation has loosened.
“Despite October’s weak number, CPI inflation remains set to make big strides towards the 2 per cent target over the next three months, as the anniversary of sharp falls in motor fuel and food prices is reached.
“Thereafter, sterling’s depreciation will begin to push inflation up sharply, utility companies will respond to the recent rise in wholesale energy prices by lifting consumer tariffs, and services inflation likely will continue to grind higher as firms grapple with big increases in minimum wages and non-wage labour costs.”