Inflation to rise above 2% by early 2017 as inflationary pressures are building in the supply chain - EY ITEM Club comments

19 July 2016

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  • Inflation nudges up…
  • …reflecting higher petrol prices and a surge in airfares
  • Weaker pound set to push up price growth

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“The uptick in inflation was largely due to the higher oil prices, which pushed up petrol prices by more than 2% on the month, while May’s unusual weakness in the volatile air fares category also unwound.

“We are likely to see inflation continue to climb over the remainder of the year. The June data was almost exclusively collected prior to the EU referendum and, therefore, was unaffected by sterling’s subsequent plunge. This should begin to feed through from next month and will become an increasingly important factor. Alongside this, today’s producer prices data suggested that some modest inflationary pressures were already building in the supply chain, with factory gate prices rising for a fifth successive month.

“These factors are likely to push the CPI measure above 2% by early-2017. However, we believe that concerns that inflation will spike up to 5% or more have been overplayed. We expect the peak in inflation to be around 3% or even lower if the pound continues to display the resilience that it has demonstrated over the past two weeks.”