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UK inflation remains static at 0.6% despite weaker pound

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Written by: Paloma Kubiak
13/09/2016
UK consumer price inflation rose by 0.6% in the year to August, defying expectations of a higher uptick.

The Consumer Price Index (CPI), which measures the price of goods and services, was unchanged from July, according to official figures from the Office for National Statistics (ONS).

It means a basket of goods and services that cost £100 in August 2015 cost £100.60 in August this year.

Rising food prices and air fares added upward pressure to the figure but it was offset by falls in hotel accommodation prices, plus smaller rises in the price of alcohol, clothing and footwear than a year ago.

Analysts had expected inflation to rise for the third consecutive month due to the falling value of sterling and higher costs faced by manufacturers and importers.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “While inflation has remained unchanged this month, the impact of currency changes works with a lag so further rises in CPI should be expected.

“With fresh concerns being raised about growth prospects in the UK, the spectre of stagflation cannot be dismissed – something the Bank of England will be desperate to avoid. So far the impact of Brexit has been muted but with the Bank almost out of ammunition, expect Mark Carney to be pushing for more support from the government in November’s Autumn Statement.

Ben Brettell, senior economist at Hargreaves Lansdown, said that manufacturers will need to choose whether the absorb the increase in costs or pass it on to consumers and if they opt for the latter, this could lead to higher consumer prices down the line.

He said: “The effect of sterling’s depreciation will take time to feed through fully into the figures, as businesses gradually adjust to the new environment. Over the next few months existing inventories will be wound down and currency hedges put in place by supermarkets and other importers will gradually start to fall out of the equation. It is only then that the full impact will be seen.

“Forecasts suggests the drop in sterling will ultimately add around five percentage points to CPI, but it’s as yet unclear whether that will come via a gradual uptick in the inflation rate over a couple of years, or a shorter, sharper bout of inflation over the coming months.”

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