Martin Flanagan: Surging inflation could prove painful

A shot to the body for post-Brexit complacency. That's the news that inflation reached its highest level in almost two years last month.

Martin Flanagan says consumers face a squeeze on their real incomes from rising inflation. Picture: John Devlin
Martin Flanagan says consumers face a squeeze on their real incomes from rising inflation. Picture: John Devlin

For much of the summer we have been agreeably surprised at how decent the economic data has been since the vote for the UK to quit the European Union last June. Manufacturing and the much bigger services sector have demonstrated an impressive resilience, much to the secret chagrin, perhaps, of some diehard Remainers.

But the near-doubling of inflation to 1 per cent in September from 0.6 per cent in August, with clothes, fuel and hotels all becoming pricier, shows the chickens have come home to roost from the slump in the value of the pound following the vote.

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Inflation jumps to highest level in almost two years

The Office for National Statistics has said there is no direct evidence the jump in inflation has anything to do with sterling’s problems. But that is the way most City economists see it, believing that as the cost of imports rises in the coming months inflation will inevitably be pushed up.

Consumers have been steadfast in the face of the Brexit shock, but if their real income is squeezed by a renewal of inflation the knock-on effect could be painful for the wider economy.

It also suggests a further interest rate cut from the Bank of England looks very much on the backburner.

Checks and balances at Burberry

It is not every day that a retailer announces a 30 per cent rise in quarterly UK like-for-like sales, and see its shares give up 7 per cent.

But the stock market knows that fashion house Burberry, after benefiting from tourist spending in the UK following the slide in the value of the pound after the Brexit vote, makes more than 80 per cent of its sales abroad.

And there things remain challenging. The City knows that Burberry has been helped by a fortuitous currency effect, while the important markets of Hong Kong and Macau are difficult and the performance in the Americas is uneven.

In short, the sterling fillip is giving the retailer a breathing space to try and get to grips with a much more difficult international macro-environment. The UK can help but it can’t take up all the slack.

The good news is all priced in and it could still be a rocky ride for the shares for a while. Await developments before buying the shares.