UK inflation stalls as retailers not reflecting higher inputs, ONS finds

UK inflation unexpectedly shrank in October, according to official figures published on Tuesday, as a large jump in producer input prices was not yet being reflected on the high street.

The consumer prices index rose 0.9% in the year to October, the Office for National Statistics said, which was down from the 1.0% rise in September and short of expectations that it would climb to 1.1%.

Month-on-month CPI rose 0.1%, versus the previous months 0.2% increase and the consensus forecast for an acceleration to 0.3%.

The ONS said the main downward pressures on the CPI 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.

Reflecting this, core CPI, which strips out more volatile prices like food and fuel, fell to 1.2% from the prior month's 1.5% rise, again short of the 1.4% consensus estimate.

Pound effects

Economists said CPI was almost certainly taking a breather on an upward journey that should see it top the Bank of England's 2% target next year, while market watchers noted that sterling fell sharply on the CPI news on Tuesday morning, losing around half a cent against the US dollar.

"The fall in the CPI reading will be seen as easing the pressure on the BoE who had been under pressure to act to curb the prospect of higher inflation readings," said market analyst James Hughes at GFX.

Despite the lower reading, he said it was unlikely to remove the upside inflationary pressure that the weak pound will bring: "With worries also circulating about the validity of Brexit, and a potential parliamentary vote around article 50, we are definitely nowhere near the end of the newsflow."

Although the ONS noted the absence of explicit evidence that the fall in the pound was having a significant impact on consumer prices, economist Scott Bowman at Capital Economics said food and fuel are two categories where exchange rate changes show up quickest, while the rise in producer input price inflation should mean CPI inflation should resume increasing in coming months as the depreciation continues to make its way through the economy.

"Accordingly, we think inflation will peak at about 3.2% in the first half of 2018. This rise in inflation will eat into households’ real incomes and lead to a slowdown in consumer spending growth," Bowman said. "However, support from low interest rates, and a probable easing of the fiscal squeeze in next week’s Autumn Statement, should ensure that spending growth doesn’t slow too sharply."

Sam Tombs at Pantheon Macroeconomics said the decline in inflation in October, after its big jump in September, mainly reflects volatility in pricing a year ago and does not imply that the relationship between sterling and inflation has loosened.

He sees inflation making "big strides" towards 2% over the next three months, as the anniversary of sharp falls in motor fuel and food prices is reached.

"Thereafter, sterling’s depreciation will begin to push inflation up sharply, utility companies will respond to the recent rise in wholesale energy prices by lifting consumer tariffs, and services inflation likely will continue to grind higher as firms grapple with big increases in minimum wages and non-wage labour costs. As a result, we still expect CPI inflation to peak at about 3.5% by the end of 2017, crippling consumers and preventing the MPC from announcing more stimulus," Tombs said.