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UK Inflation to Accelerate on Rising Fuel Costs and Exchange Rate


The monthly inflation figures for December will be released later today during the European trading session and go by the recent rise in fuel prices and higher costs among British companies; inflationary pressures are expected to maintain the upward pressure.

Many manufacturing firms in Britain are already dealing with higher input costs which are expected to persist in the coming months as a weaker exchange rate is set to push the price of imports higher in the UK. Last week, reports from the manufacturing and construction sectors showed a sharp increase in the price paid by firms in Britain as companies grapple with smaller profit margins.

UK Consumer Price Index (Nov 2016): 1.2%

British Manufacturing and Construction firms flag higher input costs

A British manufacturer’s organization, EEF flagged higher costs in its latest survey of 281 executives at a senior level. The survey also showed that firms were optimistic on the growth prospects of improved sales this year despite higher anticipated costs.

The survey report said that companies experienced a surge in input costs which rose to multiyear highs, largely on a weak exchange rate which is expected to prevail in the coming months. As a result, the cost pressures are expected to gradually feed into higher consumer prices this year.

In a separate publication released by the Federation of Master Builders, over 70% of the companies that it polled recorded an increase in material prices on account of the fall in the exchange rate since the Brexit vote. A spokesperson for the organization said that many small building firms were facing rising costs of materials since the depreciation of the exchange rate since the EU referendum with small-medium businesses reporting around 20% increase in timber prices for example. The Federations aid that with over a quarter of building materials in the UK being imported, this raised the significant cost for businesses in the construction sector.

Despite the increase in prices, both the sectors were seen posting steady gains as evidenced by the recent manufacturing and construction PMI data released in the first week of January.

Fuel prices rise to 18-month high in the UK

Early last week, RAC released its latest Fuel Watch data which showed that fuel prices in the UK are set to continue rising with British motorists already facing the highest bill in nearly 18-months. Oil prices in the UK fell steadily since the summer of 2014 due to oversupply concerns.

However, last year’s November 30th OPEC meeting saw the oil producing nations strike a deal between themselves and few non-OPEC producers to limit production levels to stabilize oil prices. The oil production ceiling came into effect since January 1st, 2017, but the effects of higher oil prices were also felt across various economies.

In the Eurozone alone, headline inflation rose 1.10% according to flash estimates released by the EU statistics agency last week. Most of the gains came from higher energy prices, which contributed close to 2.5%.

Meanwhile, the British pound continues to remain volatile on Brexit comments. On Monday last week, the pound fell 0.71% since the open, gaping lower. The declines came after comments from PM Theresa May on hard Brexit sent the currency tumbling. It also renewed speculation that the British pound could start to resume its bearish trend once again. The U.S. dollar remains on a firm footing with an uptick in economic growth alongside higher wages and inflation, all of which support the hawkish Fed’s view of looking at hiking interest rates at least thrice this year.

The Bank of England has reiterated its willingness to tolerate an overshoot of inflation for a short while, but the question remains for how long. Consumer prices in the UK are still below the 2% threshold but given the current pace of weaker exchange rates, higher oil prices, it wouldn’t be surprising to expect inflation rise higher at a faster rate than previously anticipated.

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Source: https://www.orbex.com/blog/2017/01/uk-inflation-accelerate-rising-fuel-costs-exchange-rate/
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