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Costs paid by UK firms escalate as inflation pressure builds: BoE survey
December 21, 2016 / 10:09 AM / a year ago

Costs paid by UK firms escalate as inflation pressure builds: BoE survey

LONDON (Reuters) - British companies’ costs for materials and imports rose at the fastest pace in around five years in the during the past three months, which will boost inflation noticeably next year, a Bank of England survey showed on Wednesday.

Men work on the production line at the London Taxi Company in Coventry, central England, September 11, 2013. REUTERS/Darren Staples

Growth in both services and the manufacturing sector improved a little in the fourth quarter, helped by the strongest reading for factory exports since the third quarter of 2014, according to the BoE survey, which is based on the findings of its staff based across the United Kingdom.

The survey added to signs that Britain’s economy has sustained a solid pace of growth through the last three months, with scant evidence of any hit to companies’ day-to-day business from June’s shock Brexit vote.

But it also highlighted growing worries about inflation since the pound’s post-Brexit drop, as well as weak investment.

Prices paid for materials by companies rose at the fastest pace since the end of 2011, while import costs rose at the fastest pace since the start of 2012, the BoE report showed.

“The BoE agents’ survey supports the view that the pound’s devaluation will be passed through (to consumers) quicker. Brexit hedging was low and the shock is seen as persistent,” said Philip Rush, chief economist of consultancy Heteronomics.

A separate survey from Citi and pollster YouGov showed expectations of inflation over the next five to 10 years among the British public rose this month to the highest level seen for a couple of years at 3.0 percent.

The BoE’s agents’ report pointed to anecdotal evidence that households had brought forward purchases of larger items such as furniture or electrical goods in anticipation of higher prices next year.

Last month, the BoE said it expected inflation to reach 2.7 percent by the end of next year, up from 1.2 percent now.

The latest BoE agents’ survey suggested sterling’s weakness boosted manufacturing factory exports in the fourth quarter, which is at odds with the Markit/CIPS business surveys that are more closely watched by the market.

But the BoE noted that the increased cost of importing equipment had started to deter some firms from investing, although there were also examples of companies bringing forward investment ahead of expected price rises.

“Some customers had switched to domestic suppliers from foreign ones following the fall in sterling,” the BoE said.

Economists expect rising inflation will squeeze household spending and slow growth next year, putting pressure on Britain’s public finances.

Official figures on Wednesday showed a slightly bigger-than-expected budget deficit in November, but the government looked on track to meet new, less ambitious deficit reduction goals set out last month by finance minister Philip Hammond.

Editing by Alison Williams

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