UK CPI inflation rose to a 2-year high of 1.2% last month. However, the annual rate of inflation still remains low by historic standards and below the Bank of England’s inflation target of 2%.
That is expected to change in the coming months though as the depreciation in sterling fuels further import cost inflation.
UK manufacturers saw their input costs rise by almost 13% y/y in November part of this cost will be passed onto consumers in due course.
It is noted that consumer goods recorded their first price rise in two years in November. For the last two years the price of consumer goods (e.g. food and fuel) had been falling.
Conversely, the price of consumer services has been consistently above 2% over that period. Petrol / diesel prices were over 7% higher last month relative to the corresponding period last year.
Meanwhile domestic home heating oil is up 14% over the same period.
Following the end of the two-year period of consumer goods price deflation food, petrol / diesel and energy bills are expected to rise further in 2017. This will represent a squeeze on disposable incomes.
Indeed, from mid-2017 we are likely to see consumer prices rising at a faster rate than wages.
It is also worth remembering that the purchasing power of household incomes will be eroded by freezes in a range of welfare benefits and tax credits from April 2016 to 2020.
The higher inflation rises, the bigger the squeeze. In turn, this is expected to reduce consumer spending and economic growth.