UK Inflation has recorded its sharpest jump in more than two years in September, even without any direct evidence of the weaker pound pushing up prices.
Figures released on Tuesday, October 18 showed the annual consumer price inflation rose to 1% from 0.6% in August, the highest level since November 2014 and the biggest jump from one month to the next since June 2014, the Office for National Statistics said.
Economists polled by Reuters had expected a reading of 0.9%, and Tuesday’s figure was at the top end of the range of forecasts. They are likely to view September’s rise as only the start of a much broader increase, fuelled by the pound’s near 20% plunge since June’s vote to leave the European Union.
The rise has been attributed to a jump in clothing prices since 2010 and a rise in fuel costs, which had been falling a year earlier.
Looking at the three months to September as a whole, prices were up 0.7% on a year earlier versus the BoE’s forecast for inflation to average 0.76% over the period.
Thomas Laskey, fixed income investment manager at Aberdeen Asset Management, said: “The worrying factor is that today’s figure represents only a tiny part of sterling’s steep drop, and no effect from the second big tumble earlier this month.”
Sterling shot up briefly against the dollar and British government bond prices fell after the stronger than expected figures which will further dampen expectations that the Bank of England will cut interest rates again this year.
BoE Governor Mark Carney last week said the central bank could tolerate “a bit” of an overshoot against its inflation target, to help accommodate economic growth and employment.
Official statisticians said they were waiting for clear signs of an impact from the weakened currency.
The slide in sterling – combined with evidence that the economy is slowing by somewhat less than the BoE thought likely – also means few economists now expect the BoE to press on with plans to cut interest rates to a new record low next month.
A pricing row last week between Britain’s biggest retailer Tesco and one of the world’s largest consumer goods companies Unilever was a first clear sign for consumers of the turbulence unleashed by the Brexit vote and of higher inflation to come.
The pound’s fall – down 19% against the U.S. currency and about 16% against the euro – has left suppliers and retailers battling for profits as imported goods become more expensive.
A fashion freefall
The fashion market has also suffered its steepest decline in sales since 2009 as consumers increasingly spend their money elsewhere.
Retail industry executives including Next’s chief executive, Simon Wolfson, reckon there has been a cyclical move away from spending on clothing back into areas that suffered the most during the economic downturn, such as eating out and travel.
Researcher Kantar Worldpanel said data for the year to September 25 showed that UK fashion has seen four months of consecutive sales decline, with nearly £700 million lost from the value of the market from this time last year.
It said June’s decline of 0.1% was the first monthly contraction in six years.
Glen Tooke, consumer insight director at Kantar Worldpanel, said: “Fashion retailers are still following the same patterns of over-buying and deep discounting and consumers are increasingly reluctant to pay full price.
“Most recently the decline has been driven by falling frequencies of buying, giving retailers fewer opportunities to encourage shoppers to part with their cash.”
Earlier this month a survey from BDO, the accountancy and business advisory firm, said Britain’s fashion retailers suffered a slump in sales in September as unseasonably warm weather deterred sales of autumn and winter collections.