Air fares, imported raw materials, food and petrol price rises plus Brexit-fuelled fall in pound will squeeze family finances in 2017

This article is more than 3 years old

This article is more than 3 years old

Inflation has jumped to the highest rate for two-and-a-half years, hitting 1.6% as the pound’s sharp drop since the Brexit vote continues to push up costs in the UK.

Official figures for December showed air fares, food prices and fuel all helped to drive the rise from 1.2% in November. The December rate, as measured on the consumer prices index (CPI), was the highest since July 2014 and higher than forecasts for 1.4% in a Reuters poll of economists.

The increase fanned concerns about a squeeze on living standards this year and economists said inflation would continue to climb much higher, leaving households worse off in real terms.

UK inflation: now it's the pound in your pocket being devalued Read more

The worries stem from sterling’s drop against other currencies since the vote to leave the EU last summer. A weaker pound has raised the costs of imports such as food and fuel, and businesses are starting to pass that on to consumers. The pound came under more pressure in recent days, dropping below $1.20 at one point, ahead of Theresa May’s speech on the Brexit process. But it recovered markedly after she promised a vote in parliament on the Brexit deal.

Conor D’Arcy, a policy analyst at the Resolution Foundation thinktank, said the latest inflation figures showed the ultra-low price rises that consumers have benefitted from in recent years were “well and truly over”.



“It will be years until we see the overall economic impact of Brexit, but the one dead cert in 2017 is rising inflation fuelled by a sharp fall in the pound. With nominal pay only expected to rise by 2.4% in 2017, the risk is we see a fresh pay squeeze with rising prices eating up all pay growth by the end of the year.”

The head of inflation at the Office for National Statistics, Mike Prestwood, said that while inflation was higher in December it was still below the Bank of England’s 2% target.

“Rising airfares and food prices, along with petrol prices falling less than last December, all helped to push up the rate of inflation. Rising raw material costs also continued to push up the prices of goods leaving factories,” he said.

But the bigger-than-expected pick up in prices will make the Bank’s task of setting interest rates tougher as it seeks to strike a balance between keeping inflation under control while providing enough support to jobs and economic growth.

“With CPI inflation now within touching distance of the Bank of England’s 2% target, there will be mounting speculation that the Bank could raise rates,” said Elizabeth Martins, economist at the bank HSBC.



“Particularly since today’s release goes beyond just oil: food, clothing, air fares and accommodation inflation all pushed higher too. But as we forecast growth to slow, we expect rates to remain on hold despite higher inflation.”

The pound is down 17% against the dollar since the referendum, and the pressure on import costs has already sparked some high profile price tussles between suppliers and retailers, such as the row over Marmite last year.



Apple said on Tuesday that it was raising prices on its UK app store by almost 25% to reflect sterling’s sharp depreciation. The new prices will roll out over the next week, giving customers a short window to beat the price increase.

Underscoring the pressures firms face, ONS figures published alongside the inflation update showed another rise in factory costs. The prices of imported materials and fuels were the largest driver, largely on the back of the pound’s depreciation and a recovery in global oil prices as curde production is cut, statisticians said.



UK economy is overheating and veering towards stagflation Read more

Prices paid by factories for materials and energy rose by 15.8% in December on a year ago, the biggest jump since September 2011. Factory gate prices rose 2.7%, their fastest annual rise since March 2012.

Thanks to those sterling-related cost pressures and higher oil prices, some economists expect inflation to rise to around 3% this year.



The Bank has said that rise would make life harder for consumers in 2017, as wages fail to keep pace with price rises, squeezing family budgets against a backdrop of slowing economic growth.

The Joseph Rowntree Foundation said lower-income families would suffer more.

“One big driver of the increase is the rising cost of the weekly shop, which will have a bigger impact on people who are struggling to make ends meet,” said Helen Barnard, head of analysis at the charity.

“People in the bottom fifth of the income scale typically spend £1 in every £6 on food, compared with £1 in every £12 for the richest fifth.”



Businesses are also bracing for tougher conditions. The manufacturers’ organisation EEF said there was an “ever increasing squeeze on manufacturers from rising input costs”.

Its senior economist, George Nikolaidis, said: “Any respite is unlikely during 2017 as increased input costs will continue to bite into profit margins in the year ahead.”

Davos 2017: Chinese president Xi and Trump adviser speak – Day One live Read more

With the UK economy largely reliant on consumers to drive growth, the Treasury has sought to highlight its efforts to support household incomes, including a planned increase in the national living wage and a freeze on fuel duty.

Commenting on the inflation figures, a spokeswoman said: “The government is committed to helping hard-working people keep more of what they earn and to supporting households with the cost of living.”

The TUC said people were going into this latest bout of Brexit uncertainty and inflation on a weak footing.

“Working people are still £20 a week worse off than they were before the last financial crisis, and now rising prices are hitting their pay packets again,” said the TUC general secretary, Frances O’Grady.



10 things that went up between November and December

Cooking oils and fats: up 5.1% (esp margarine)

Bread and cereals: up 1.3%

Vegetables: up 0.9% (esp cauliflowers )

Air fares: up 48.9%*



Soft drinks and mineral water: up 1.4%

Furniture and furnishings: up 2.6%

Household appliances: up 1.9% (eg cookers, freezers, dishwashers)

DIY materials: up 2% (eg tiles, wallpaper, paint)

Pets and pet care: up 0.6%



House contents insurance: up 1.2%

* Air fares typically rise in December but in December 2016 they rose by more than in December 2015



Source: ONS

