MNI INTERVIEW (RPT): Weak Pound Still To Hit UK Inflation-ONS

(Repeats article first published on June 22)

UK imported inflation may see further upside driven by the pound's fall against the dollar, but sterling weakness has yet to be reflected in the data, Office for National Statistics chief economist Grant Fitzner told MNI on Wednesday.

“It’s not showing in our figures yet in terms of import prices but it’s certainly something to watch in the months ahead if that trend continues,” Fitzner said, adding that he had noted warnings by Bank of England MPC member Catherine Mann and its chief economist Huw Pill about the inflationary effect of a lower exchange rate.

Speaking at an MNI Connect event on Monday, Mann, who last week unsuccessfully backed a 50-bps hike in Bank Rate, highlighted "additional depreciation pressure on sterling that could add to inflation, particularly in the near term”.

Input prices for producers, which reflect imported material costs, soared by a fresh record 22.1% in May, before much of the recent sterling weakness.

Overall consumer price inflation edged higher in the month, rising at an annual rate of 9.1% after 9.0% in April. Fitzner noted some broad-based inflation, but said “key drivers continue to be electricity prices, gas prices and motor vehicles – up around a third on the year.”

CONSUMER SLOWING

However, he also observed that some price categories are starting to see declines, as is the case with second-hand cars, which have been getting cheaper since the start of the year. This tendency could be amplified if retailers begin discounting to reduce inventories built up to protect against supply chain disruption as consumer demand slows.

“It’s another trend to look out for in coming months, certainly it’s been seen in the U.S., a lot of major retailers built up heavy inventory and are now engaged in significant price discounting,” Fitzner said. “We might see something similar in the months ahead in the UK as households pare back on their non-essential spending.”

WAGES

Higher wages, albeit not in real terms, are also a factor in inflation, though their precise contribution is hard to determine.

“Services sector price rises, fairly labour intensive, are probably reflecting some higher wages, but there are also the higher energy costs and other costs as well,” Fitzner said. “It can be quite difficult to unpack what’s driving those increases -- and let’s not forget higher energy prices impact pretty much all businesses to a lesser or greater extent.”