Fresh details on price rises and wage growth this week are expected to underline the rising pressures on UK household budgets as the pound’s sharp fall since the Brexit vote continues to stoke inflation, The Guardian reports.
The Bank of England has warned the economy’s main engine of growth, consumer spending, will lose momentum this year as rising living costs eat into people’s budgets. Economists expect official figures on Tuesday will vindicate those worries, with inflation forecast to have reached its highest level for more than three years in March.
The consumer prices index (CPI) measure of inflation is forecast to be 2.3 per cent for the second month running, according to the consensus in a Reuters poll of economists. There was a broad range of views in the survey, with the lowest forecast at 1.9 per cent and the highest at 2.5 per cent.
Labour market figures on Wednesday will offer new insights into whether looming Brexit negotiations have started to affect hiring decisions and will shed light on whether pay growth is keeping pace with inflation, or if incomes are in fact falling in real terms.
Economists forecast average pay growth slipped to 2.2 per cent in the three months to February, compared with a year earlier.
“Worrying for UK growth prospects, the fundamentals for consumers look odds-on to weaken markedly further over the coming months as rising inflation eats further into purchasing power with the squeeze reinforced by muted earnings growth,” said Howard Archer, chief UK and European economist at the consultancy IHS Markit.
“We expect inflation to reach 3 per cent before the end of 2017 and it could well rise further, to a peak around 3.3 per cent, in the early months of 2018.”
The sharp fall in the pound since the referendum last summer has raised the price of imported goods such as fuels, metals and food ingredients. That has sparked some high-profile price tussles between suppliers and retailers, such as the row over Marmite last year.
There have also been moves by food manufacturers to shrink their products while holding the price. Doritos, Peperami and Coco Pops were the latest products to be affected by “shrinkflation”.
While economists agree that the underlying trend in inflation will be upwards this year, as higher oil prices add to pressure from the weak pound, some see a good chance the measure will fall back in March’s figures.
Economists at HSBC forecast inflation dipped to 2.2 per cent year on year from 2.3 per cent in February. “In March, inflation pressures should ease a touch, with oil and petrol prices having fallen over the month. Moreover, Easter fell in March in 2016 but is not until April in 2017, which will favour the comparison – although obviously this effect will go into reverse in April,” they wrote in a preview note.
Alan Clarke, an economist at Scotiabank, expects inflation to drop to 2.1 per cent, thanks to the Easter impact on airfares being delayed until April this year, as well as softer fuel prices and a reversal of February’s “lettuce crisis”, when bad weather hit harvests in southern Europe and pushed the price of an iceberg up 67 per cent.
But economists at Investec predict inflation will nudge up to 2.4 per cent, taking it further beyond the Bank’s 2.0 per cent target. “We anticipate further upward pressures from food, clothing and utilities – the latter reflecting the fact that two major utility companies raised prices, electricity prices in particular, on the month,” said Investec’s Chris Hare.
A separate report from Lloyds added to evidence that companies were passing on some of their rising costs to customers. The bank’s regular health check on businesses in England and Wales found activity rebounded in March, helped by improving order books. But hiring slowed and average prices charged for goods and services rose at the fastest pace for almost six years.
The weaker pound also has benefits for UK businesses, because it makes their goods and services significantly cheaper in overseas markets.
The forecaster EY Item Club predicted a revival in the UK’s overseas markets will support the economy’s readjustment away from consumer spending towards trade, and help smooth the impact of Brexit on economic growth.
The group’s spring forecast, released on Monday, notes consumer spending provided all the UK’s growth last year, while overseas trade subtracted 0.4 per cent from GDP. But the balance of economic activity in 2017 would be different.
It expects the pound’s drop, along with improving fortunes for the UK’s big trading partners, to spur exports growth, with net trade forecast to add 0.2 per cent to GDP this year and another 0.6 per cent in 2018.
The UK economy will grow 1.8 per cent this year, matching last year’s performance, but then growth will ease to 1.2 per cent in 2018, the group predicted. Against that backdrop, the Bank of England is forecast to hold interest rates at their record low of 0.25 per cent until the autumn of 2018.
“Although the starting gun for Brexit has just been fired, the UK economy has been adjusting to life outside the EU since the referendum,” said Peter Spencer, chief economic adviser to the EY Item Club.