Business leaders warn of '˜stagflation' as pound falls

Businesses have warned of the risk of '˜stagflation' after inflation jumped to a two-year high following post-Brexit slump in the value of the pound.

Picture: John Devlin
Picture: John Devlin

Rising costs for clothes, restaurants and hotels have pushed up the cost of living, with the Consumer Prices Index (CPI) hitting a higher-than-expected 1.0% in September, up from 0.6% in August.

Economists had expected an increase of 0.9%.

Sign up to our Politics newsletter

The Office for National Statistics (ONS) said there was “no explicit evidence” that sterling’s slump had pushed up prices of consumer goods, but Michael Martins, Economist at the Institute of Directors, said rising inflation could be linked to Brexit.

“Sterling’s depreciation has had a mixed effect so far. Some essential items like petrol have seen higher prices, while others like food have not.

“Prices will likely continue to rise, with the Bank of England focusing more on economic and financial stability rather than inflation.

“Given weak wage growth in recent years, it seems likely that higher inflation, especially on essential items like food and energy, will begin to eat into real disposable income.”

Mr Martins added: “If wages and business investment enter a serious decline, the UK could find itself along the path towards stagflation, where an economy stalls or shrinks, but inflation increases – a particularly nasty spiral.”

The value of the pound has fallen nearly 20% against the US dollar since Britain voted to leave the European Union.

The Retail Prices Index (RPI) - a separate measure of inflation, which includes housing costs - rose to 2% in September, up from 1.8% in August.