In­fla­tion jumps to high­est level since May

With price rises ex­pected to hit 3pc in com­ing months, house­hold­ers will need to dig deep for some time yet, re­ports Tim Wal­lace

The Daily Telegraph - Business - - Front Page - By Tim Wal­lace

PRICE rises ac­cel­er­ated in Au­gust as costs for clothes, shoes, fur­ni­ture and tele­phones all picked up pace.

In­fla­tion hit 2.9pc, the Of­fice for Na­tional Sta­tis­tics said, up from 2.6pc in the 12 months to July and the high­est level since May, in­di­cat­ing that the fall back in price pres­sures in June and July may have been a blip in the up­ward trend.

The weak pound has pushed up im­port prices and that has fed through into costs for shop­pers, hit­ting house­holds in the pocket.

Prices for clothes and shoes rose by 4.6pc on the year, the fastest pace in al­most 30 years. Trips to restau­rants and ho­tels also be­came 3.5pc more ex­pen­sive com­pared with Au­gust 2016.

How­ever, food in­fla­tion slowed down, dip­ping from 2.6pc in July to 2.1pc in Au­gust, re­duc­ing the in­ten­sity of the pres­sure on the weekly shop.

House­holds are un­der in­creas­ing strain – the lat­est pay num­bers show earn­ings rose by 2.1pc in the year to June, with prices ris­ing at a faster pace. “In­fla­tion re­sumed its as­cent as the Brexit-in­duced fall in ster­ling con­tin­ued to push up the cost of liv­ing for fam­i­lies,” said Richard Lim at Retail Eco­nomics.

“With wage growth re­main­ing dis­ap­point­ingly slug­gish, ris­ing prices across food, cloth­ing, en­ergy and trans­port have in­ten­si­fied the pres­sure on per­sonal fi­nances. House­holds will con­tinue to tran­si­tion to a pe­riod of lower lev­els of spend­ing power over the com­ing months, which will put fur­ther pres­sure on con­sumer spend­ing.”

Econ­o­mists ex­pect in­fla­tion will peak at more than 3pc later this year be­fore start­ing to fall back again.

Clothes are more ex­pen­sive. Women are suf­fer­ing run­away in­fla­tion in the shoe de­part­ment. Cof­fee prices are boil­ing over. Af­ter a wel­come spell of fall­ing prices and in­tense com­pe­ti­tion be­tween shops, Bri­tish house­holds are feel­ing a wave of in­fla­tion.

Price rises are not dra­matic by his­tor­i­cal stan­dards – at 2.9pc con­sumer price in­fla­tion is nowhere close to its 2011 lev­els of more than 5pc – but costs are out­strip­ping wage growth which makes for an un­com­fort­able time when work­ing through the house­hold fi­nances.

Econ­o­mists ex­pect in­fla­tion to peak at a lit­tle over 3pc be­fore fall­ing back once more. But it might not be that sim­ple.

The food sec­tor ap­pears to have un­der­gone a se­ri­ous shift in at­ti­tudes.

Cur­rency mar­kets have pushed in­fla­tion up in the past year, but the worst might not be over yet.

And pay growth is not pick­ing up de­spite record low unem­ploy­ment.

The weekly shop

Su­per­mar­kets have changed their pric­ing sys­tems to adapt to the squeeze.

For sev­eral years the big gro­cers were en­gaged in a fierce price war, chop­ping costs and of­fer­ing eye­catch­ing dis­counts and pro­mo­tions to lure shop­pers through the door.

But there is only so far that strat­egy can run as mar­gins are eroded. Now that the cost of im­ported goods – from trop­i­cal fruits and for­eign-raised an­i­mals to im­ported clothes and house­hold equip­ment – is on the rise, shops have to work out how to pre­serve their prof­its.

Shop­pers have be­come in­creas­ingly savvy in re­cent years, keep­ing their eyes peeled for a good deal.

That means they also spot price rises, which puts the gro­cers in a dif­fi­cult po­si­tion.

“There is only so far that re­tail­ers can eat into mar­gins be­fore they get into trou­ble, and a lot of them have reached that point where they have no real al­ter­na­tive but to put up prices,” says Toby Clark at Min­tel.

“In gro­ceries, ev­ery­day prices have not changed as much as head­line in­fla­tion, but there is less dis­count­ing. It is a way to pro­tect mar­gins with­out putting through across-the-board price rises – dis­counts and pro­mo­tions are much more spo­radic now, so this is less no­tice­able than a rise in prices.”

The slip­pery ster­ling ef­fect

The im­pact of the weak pound also has fur­ther to run.

Ster­ling did not just fall on the Brexit vote – the pound was drop­ping through­out the first half of last year.

Since the ref­er­en­dum it has also dipped fur­ther as the eu­ro­zone economies have gath­ered steam, push­ing the euro up and so the pound down. On top of that, moves in the ex­change rate do not af­fect shop prices in­stantly.

Com­pa­nies can try to ab­sorb the cost or de­lay pass­ing it on, while some well-pre­pared firms had cur­rency hedges in place to pro­tect them­selves against an un­ex­pected slump in ster­ling. Most of those pre-ref­er­en­dum hedges have now ex­pired, so those shops have got to make dif­fi­cult choices on how to cover the higher im­port costs.

Econ­o­mist Philip Shaw at In­vestec es­ti­mates that around 35pc of the ex­change rate move­ment is passed on to changes in prices – as not every item on the shelves is im­ported – and that just over half of that change in prices takes place in the first year af­ter a cur­rency move. This would in­di­cate that al­most half of the fall in the pound since the Brexit vote is still to hit con­sumer prices, and there could be a longer tail ef­fect as the cur­rency fell fur­ther on Theresa May’s Con­ser­va­tive Party con­fer­ence speech last au­tumn.

That said, the pound does not move in iso­la­tion. The euro has risen strongly but could fall back a lit­tle in com­ing months, for ex­am­ple, which would push ster­ling up once more and take the edge off the rise in im­ported in­fla­tion. Mr Shaw pre­dicts a slow de­cline in in­fla­tion, ris­ing to above 3pc in the com­ing months be­fore fall­ing to 2.3pc by De­cem­ber 2018 and 2pc over 2019 as a whole.

Do­mes­tic price pres­sures

There is also do­mes­ti­cally gen­er­ated in­fla­tion to con­sider – not ev­ery­thing re­lates to the ex­change rate. Econ­o­mists at No­mura have built an in­dex by com­pil­ing the 30pc of prices which are least cor­re­lated with the pound. This do­mes­ti­cally gen­er­ated in­fla­tion in­dex stood at 1.7pc a year ago but has risen to 2.5pc, in­di­cat­ing grow­ing price pres­sures re­gard­less of the changes in ster­ling. Ge­orge Buck­ley at No­mura says this in­di­cates the econ­omy is run­ning at close to full ca­pac­ity, sug­gest­ing these in­fla­tion­ary pres­sures will not dis­ap­pear.

Pro­ducer price fig­ures from the ONS also hint at this. Fac­tory gate prices rose 3.6pc in Au­gust af­ter in­fla­tion dipped in pre­vi­ous months, in­di­cat­ing com­pa­nies might start to charge more for their goods.

At the same time one fea­ture tra­di­tion­ally as­so­ci­ated with an econ­omy op­er­at­ing at full ca­pac­ity is con­spic­u­ous by its ab­sence: pay rises.

Unem­ploy­ment is at the low­est level seen in more than 40 years, con­di­tions which nor­mally force com­pa­nies to pay more to at­tract and re­tain work­ers. Yet there is lit­tle sign of this now and econ­o­mists do not ex­pect a re­cov­ery – even in 2018 econ­o­mists pre­dict pay will rise by 2.6pc and prices by 2.5pc, a mea­gre rate of real pay growth which will not over­turn this year’s de­cline.

In­fla­tion might be close to its peak, but that does not mean price rises will sim­ply drop away. A steady grind of ris­ing prices and stag­nant pay looks more likely than any dra­matic crunch and re­bound in liv­ing stan­dards.

A bill­board for H&M on Lon­don’s Ox­ford Street. Shop­pers have seen clothes prices across the UK rise sharply in re­cent months

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