Bank of England sees inflation spreading beyond food and fuel

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Reuters

The Bank of England says price rises already seen in food and fuel will spread to other goods later this year.

In a monthly report of business conditions, the Bank said the cost of manufactured goods would also rise.

Companies which made bets to mitigate against last year’s drop in sterling will soon see those bets expire, increasing their costs, it said.

However, more exports and “resilient consumer demand” had encouraged more investment, the report said.

“So far, the main effect on consumer prices had been higher food and fuel prices,” said the central bank.

“But a wider range of goods prices were expected to be affected over the coming year, causing inflation to rise further.”

Rising air fares and food prices helped to push up UK inflation to its highest rate since July 2014 in December.

The annual rate of Consumer Prices Index (CPI) inflation rose to 1.6%, up from 1.2% in November, according to the Office for National Statistics.

And higher costs for imported materials and fuels pushed up producer prices.

Pay rises kept down

With the price of oil and many other raw materials being set in dollars, the pound’s slide from as much as $1.49 last summer to about $1.25 today has raised costs for many businesses.

February’s report suggested a “slight rise in total labour cost growth in the year ahead” due to “difficulties in hiring and holding on to staff”. It said costs from the forthcoming apprenticeship levy of 0.5% on company payrolls, would push up costs. The levy aims to raise £3bn a year and fund three million apprenticeships.

But pay rises will be kept down by what it termed “economic uncertainty” and a difficulty in passing on cost increases to customers.

The report from the central bank makes use of data gathered from its business contacts between late November 2016 and mid-January 2017.

The Bank has 12 Agents based around the UK who gather economic and financial conditions affecting businesses in their area.

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