(Repeats from Thursday without changes)
By Andy Bruce
LONDON Oct 13 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.
Yields on long-dated British government bonds have jumped
higher in recent days as markets brace for the return of
inflation which briefly sank below zero in 2015.
Economists at some leading banks are predicting a leap to
around 3 or nearly 4 percent by the end of next year, up from
0.6 percent in August.
A Reuters poll of economists on Thursday showed a wide range
of forecasts for consumer price growth next year, but all agreed
inflation will rise significantly from current levels.
"Rising inflation is rarely good news for consumers. But in
a world of sluggish ... wage growth and low rates of return on
savings, it is especially bad," Kallum Pickering, an economist
at Berenberg Bank, said.
The poll's median forecast showed consumer price inflation
will average 2.3 percent next year, above the Bank of England's
2 percent target. Economists think it will top 1 percent by the
end of this year.
But predicting the path of inflation with much accuracy is
something that forecasters - not least at the BoE - have
struggled with over the years.
While there are established models showing how much a fall
in the value of currencies will pass through into inflation, the
variables surrounding the pound's plunge complicate the outlook,
including oil prices which hit a one-year high this week.
Analysts expect further increases next year when the
Organization of the Petroleum Exporting Countries 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
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.
On Thursday, 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.
BANK OF ENGLAND RELAXED
BoE policymakers have signalled they will probably tolerate
rising inflation, just as the central bank did in 2011 when
consumer prices increased more than 5 percent, fuelled by
surging oil prices and a weakened pound following the 2008/09
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 U.S. dollar might test this approach.
"We think the currency would need to sustain a level of
$1.10 to prompt any serious talk of a rate hike - all else
equal," said JPMorgan economist Allan Monks.
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.
Its newest rate-setter, Michael Saunders, this week
suggested the BoE could end up overlooking high inflation for
years if Britain ends up with a bad deal after leaving the EU,
so long as inflation expectations and pay growth keep in check.
Given that 94 percent of chief financial officers from major
British companies said reducing costs would be a priority over
the next 12 months, according to Deloitte survey on Monday, weak
wage growth looks a likely prospect.
BoE Governor Mark Carney has had to write public
explanations through 2015 and this year for why inflation has
undershot the central bank's 2 percent target.
Some forecasters believe he will soon have to be writing to
Philip Hammond explain why inflation is running above it.
Economists at HSBC think sterling - which was trading around
$1.22 on Thursday - will weaken by another couple of cents
before the year, a scenario that sets up the prospect of
inflation running at around 3.7 percent by the end of 2017.
Samuel Tombs from Capital Economics takes a similar view,
and added that a further fall in the pound - perhaps to $1.10 -
could result in inflation averaging 4 percent in 2018.
"Sterling is now extremely volatile, and the large current
account deficit suggests that it will fall further if overseas
investors become more concerned that the UK government will opt
for a hard Brexit," Tombs said.
(Editing by William Schomberg and Peter Graff)