Surprise dip in UK inflation but factory gate prices accelerate

UK consumer prices rose at a slower annual rate in October than they did in September, the Office for National Statistics (ONS) said on Tuesday.

The Consumer Prices Index (CPI) rose by 0.9% in the year to October 2016, compared with a 1.0% rise in the year to September.

Economists had predicted a further increase in the CPI because of sterling’s fall since the UK voted to leave the European Union.

However, the ONS also reported that the cost of raw materials and fuels purchased by producers (input prices) and factory gate prices (output prices) rose much faster in October.

The prices of goods leaving factories rose by 2.1% in the year to October 2016, the biggest increase since April 2012 and up from a rise of 1.3% in the year to September 2016. Output prices rose by 0.6% between September and October, compared with an increase of 0.3% the previous month.

Costs faced by producers for raw materials and fuel rose by 12.2% in the year to October 2016, compared with a rise of 7.3% in the year to September 2016. Between September and October input prices rose by a record 4.6%, compared with an increase of just 0.1% the previous month.

“After initially pushing up the prices of raw materials, the recent fall in the value of the pound is now starting to boost the price of goods leaving factories as well,” commented ONS statistician Mike Prestwood.

“However, aside from fuel, there is no clear evidence that these pressures have so far fed through to the prices in shops,” he added.

Andrew Sentance, senior economic adviser at professional services firm PwC, said that consumer prices are likely to go up significantly in the coming months.

“In the months ahead and next year, we should still see a significant increase in inflation reflecting higher import costs for manufacturers and retailers. The latest PwC projections — published today — suggest that CPI inflation should be between 2.5 and 3% by the end of next year, much in line with the Bank of England’s latest forecast.

“This will squeeze the growth of consumer spending and reinforce the projected slowdown in economic growth next year arising from the uncertainty created by the EU referendum vote.”