UK household squeeze yet to materialise as inflation falls short of October forecast

Britain's consumer price index inflation (CPI) rate grew slightly less than forecast in October, according to official data released on Tuesday (15 November).

The Office for National Statistics (ONS) said the main downward pressures on inflation were a decline in clothing prices and university tuition fees, which grew less than they did a year ago. The price of games and toys, overnight hotel stays and non-alcoholic beverages also declined, although the drop was offset by an increase in fuel prices.

According to the ONS, inflation grew by 0.9% year-on-year in October, compared with analysts' expectations for a 1.1% increase and after climbing 1% in the previous month.

On a month-on-month basis inflation edged 0.1% higher, slightly below the 0.2% gain posted in the previous month.

However, analysts described the unexpected fall as a blip, as sterling weakness continues to raise the cost of inputs for UK businesses. The cost of raw materials and fuels bought by UK companies jumped at the highest monthly rate on record in October, with total input prices up 4.6% from September.

"It should be only a matter of time before this feeds into higher consumer prices," said Ben Brettell, senior economist at Hargreaves Lansdown.

"With wage growth expected to be weak in the wake of the vote to leave the EU, real wages look set to fall next year."

Earlier this month, the Bank of England (BoE) forecast inflation will rise sharply "largely as a result of the depreciation of sterling since" the Brexit vote.

The BoE expects CPI to rise from its current level of 1% to around 2.75% in 2018, the highest forecast for inflation the central bank has ever made. It forecasts inflation will gradually fall back over the course of 2019 to reach 2.2% in three years' time.

BoE Governor Mark Carney warned that these rises in inflation would hit high-street food and clothing prices. He said: "Modest supply growth ultimately means lower real income growth."

Scott Bowman, UK economist at Capital Economics, forecast inflation to peak at 3.2% by the first half of 2018.

"This rise in inflation will eat into households' real incomes and lead to a slowdown in consumer spending growth," he added.

"However, support from low interest rates, and a probable easing of the fiscal squeeze in next week's Autumn Statement, should ensure that spending growth doesn't slow too sharply."