Inflation rises to 3.3% - as retailers prepare to put up prices

Inflation climbs even further above target - and a report suggests many firms will use the imminent VAT hike to push prices up further...

by James Taylor
Last Updated: 19 Aug 2013
The Office for National Statistics said today that the Consumer Price Index measure of inflation has risen 0.1% to 3.3%, even further above the Bank of England's 2% target. To compound matters, KPMG reckons that 60% of retailers will use the VAT hike as an excuse to increase prices - in many cases, by more than the extra cost implied. In some ways you can't blame them, given the rise in their own costs and all the discounting they've done lately. But if it doesn't frighten us away from the shops altogether, chances are this could push inflation even higher in the new year.

The 0.1% rise in CPI inflation means it has now been above target for 12 whole months, and the Bank's Monetary Policy Committee is split over the best way to deal with it. One member is arguing for an interest rate hike to prevent improving demand driving up prices. But most seem to think that the Government's cuts and tax hikes will eventually reduce demand (when we finally face up to the grim reality) and bring inflation back down below target.

Still, that may not happen any time soon. Aside from another big jump in fuel prices, record increases in the cost of food (up 1.6%) and clothing (up 2%) were largely responsible for this month's increase, just as they were last time around (apparently men's outerwear was a big seller - wonder why?). And today's report from KPMG suggests the big retailers are planning further price hikes; ostensibly, these will be timed to coincide with January's 2.5% hike in VAT, but apparently, no less than 40% of all UK firms are planning bigger increases than that.

The British Retail Consortium reckons this is nonsense. But it wouldn't be entirely surprising. Many have been discounting heavily in the last couple of years to keep business coming through the doors, so they'll have been looking to increase prices eventually, to boost margins. More significantly, their own costs have shot up lately, with the weak pound making it expensive to import goods and raw materials. A good barometer of this is the ONS's producer prices tracker, which shows manufacturers' cost of goods: this was up nearly 1% in November, and a whopping 9% year on year.

Prices do look set to rise on the high street, and there's a good chance that could mean higher inflation in the short term. But it's a balancing act: if prices go up too steeply, just as customers are starting to feel the pinch, retailers could end up shooting themselves in the foot by driving customers away. It may be that their bottom line is better served by sucking up the extra costs. If they can afford to, that is.

Tags:
Economy Retail

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