LONDON: Prices are going to rise in Britain. The only question now is by how much.
The prospect that much-loved brands like Marmite spread and PG Tips tea might vanish from Tesco supermarkets is the first taste of what economists say will be rising inflation. Next up, the cost of fuel is likely to rise later this month.
The resilience of consumers since June’s shock vote to leave the European Union will be tested in the coming months by the Brexit-induced fall in the value of the pound which hit an all-time low against a range of currencies on Wednesday.
Economists at some leading banks are predicting a leap to around three per cent or nearly 4pc by the end of next year, up from 0.6pc in August.
A poll of economists yesterday showed a wide range of forecasts for consumer price growth next year, but all agreed inflation will rise significantly from current levels.
The poll’s median forecast showed consumer price inflation will average 2.3pc next year, above the Bank of England (BoE)’s 2pc target. Economists think it will top 1pc by the end of this year.
Analysts expect further increases next year when the Opec plans, potentially with non-Opec producer Russia, to cut production in a bid to rein in a global glut.
Some elements behind the expected rise in inflation are crystal clear.
The prices paid by factories for raw materials and goods – the first point in the inflation pipeline – grew in August at the fastest annual pace since late 2011.
The Petrol Retailers Association said British motorists can expect fuel pump prices to increase by 4 or 5 pence per litre by the end of this month, barring a rebound in sterling, from around 110 pence at the moment.
Yesterday, Britain’s biggest retailer Tesco pulled some Unilever products from its website in a pricing row sparked by the plunge in the pound. Unilever, which makes products such as PG Tips, Marmite, Persil washing powder and Ben & Jerry’s ice cream, is seeking to raise the prices it charges big supermarkets.
Major car manufacturers, including Ford, General Motors’ Vauxhall brand and French marque Peugeot, have already raised prices in response to the weaker pound.
The scale of the price rises for British shoppers may depend on the type of goods, or even the retailer, given their different strategies for hedging.
BoE policymakers have signalled they will probably tolerate rising inflation, just as the central bank did in 2011 when consumer prices increased more than 5pc, fuelled by surging oil prices and a weakened pound following the 2008-09 recession.
The bank’s rate-setters know they cannot curb inflation by raising interest rates without risking a hit to economic growth which already looks set to slow markedly next year.
Only a further sharp fall in the value of the pound towards parity with the US dollar might test this approach.
But economists increasingly expect the slump in the pound so far and its knock-on effect on inflation will stop the BoE from pumping more stimulus into the economy in November, something the central bank had flagged as recently as last month.
Given that 94pc of chief financial officers from major British companies said reducing costs would be a priority over the next 12 months, according to Deloitte survey, weak wage growth looks a likely prospect.