Despite that economists expected inflation—measured by the Consumer Prices Index (CPI)—to rise to 1.1%, today’s (15 Nov.) figures show that it only rose by 0.9%, compared with 1.0% in September. The CPI’s fall to 0.9% is mainly due to cheaper clothing, as the Office for National Statistics (ONS) said. The Pound fell to $1.241 against the US dollar, as traders reacted to the inflation report. City analysts say that the dip in inflation is temporary and are predicting an increase to 1.1% during the coming months.

The ONS reported: 

The main downward contributors to the change in the rate were prices for clothing and university tuition fees, which rose by less than they did a year ago, along with falling prices for certain games and toys, overnight hotel stays and non-alcoholic beverages.
These downward pressures were offset by rising prices for motor fuels, and by prices for furniture and furnishings, which fell by less than they did a year ago.

UK inflation report

Inflation is a continued rise in the prices of goods and services in an economy. Any rise in the figures of inflation means that the Pound is worth less, since you will be able to buy less goods and services. Also, if your wages aren’t increasing as much as the inflation rates, then you are getting poorer. 

Today’s report might show a surprise drop, but this is only temporary. Economists are warning that consumer prices will soon increase. The ONS said that “factory gate pricing” (the price of finished goods sold by manufacturers to retailers) and the prices of raw materials rose considerably in October. Factory gate prices don’t include the cost of delivering products because the goods are collected by the buyers themselves. ONS statistician, Mike Prestwood, said that the weak Pound has pushed up “the prices of raw materials” and is “now starting to boost the price of goods leaving factories as well." This will eventually affect the prices of goods sold to consumers. If factory gate pricing increases, then the price of a finished product sold to consumers will be much higher, since there will be the extra costs of transportation and insurance included.

UK producer prices

With a weak Sterling, and raw materials and fuel being more expensive, manufacturers and retailers are the ones who have to put up with the higher costs. Consumers aren’t affected so much yet, but with prices swelling, shops might also begin to increase their prices. 

This is the concern that Neil Wilson of ETX Capital voices: “While inflation eased last month there is a ticking time bomb in the PPI data, which measures the costs of goods for manufacturers. And here there is a sign that much higher consumer inflation is on its way. The ONS data showed factory gate prices for goods produced by UK manufacturers rose 2.1% in the year to October 2016, which was a sharp jump from the 1.3% in the year to September 2016.”

Inflation will rise in 2017

Currency exchange firms and investment companies are predicting a rise in inflation in the coming months. In the early part of the New Year, they see a sharp increase in prices. Tom Stevenson, investment director for personal investing at Fidelity International, says:

“Against all expectations, the CPI rose by just 0.9% in the year to October, slightly lower than September’s 1% increase. However, prices are still rising faster than at any time since late 2014. The rise in prices continue to be driven by sterling’s recent weakness which has raised the cost of imported fuel and food. Consumers can expect UK inflation to continue rising into next year as the impact of the pound’s slide continues to be felt. The conventional wisdom is that the Bank of England’s 2% inflation target will be left behind in 2017.”

Today, during his grilling by the Treasury Select Committee, Mark Carney, the governor of the BoE, said that inflation is going to rise to 2% in the coming months. He explained that the weakening pound will push up the prices of imported goods. “It’s coming,” he stressed. 

New Measure for Inflation

The ONS has announced that from March 2017 there will be a new measure of inflation which will include the cost of owning a home. The measure is called CPIH and it will likely show a higher inflation rate. The problem with this is that it will impact the economy and incomes. Since the Bank of England is using the 2% CPI target to set its interest rates, a higher inflation rate will mean higher interest rates too. But this is a long way from happening, and changing the Bank’s procedures or its CPI target—which will affect pensions, benefits and taxes—isn’t in anybody’s interests.