UK inflation reaches two-year high

Business news and opinion

8 November 2016

The UK's consumer price index has hit a two-year high, with inflation rising to 1% in September, which surprised some City analysts.

This is up from 0.6% in August, and marks the biggest increase in the price of consumer goods and services since November 2014.

Period of low inflation now over

It's worth noting that the UK has had generally very low inflation for around two and a half years, and this increase is still well below the Bank of England's target of 2%. According to the Office of National Statistics (ONS), increased prices for clothes, fuel and overnight stays in hotels are largely responsible.

So far the decrease in the value of the pound hasn't yet had an impact on high street prices. Mike Prestwood, Head of Inflation at ONS, told The Independent: "The prices paid by manufacturers for raw materials were unchanged over the month and there is no explicit evidence the lower pound is pushing up the prices of everyday consumer goods."

Imported goods likely to increase in price

In the longer term, however, the low value of the pound isn't good news for importers. Food costs are likely to go up next, as the high-profile dispute between Unilever and Tesco over passing on price increases shows. The supermarket faced a shortage of key high-street brands – including Marmite and Pot Noodle. Though the disagreement was resolved quickly, it's an early indicator of what can happen as imported goods become more expensive. 

What this means for small businesses

There's a risk that these price increases could hurt profit margins, as businesses can't always pass these costs on to consumers. Consumer spending may drop too: consumer inflation has been below wage inflation (around 2%) for the past few years. If this changes and salaries don't match rising prices, people will have less disposable income.

The good news is that now is a great time for businesses to start branching out into exports, as the lower value of the pound will increase the spending power of foreign buyers.