UK’s inflation jumps to five-year high, eurozone stable

17 October 2017 11:17 Source:ICIS News

LONDON (ICIS)--The UK’s inflation rose to 3% in September as a depreciated sterling put pressure on imported goods, while prices in the eurozone remained stable during the month at 1.5%, official statistics showed on Tuesday.

According to the UK’s Office for National Statistics (ONS), the five-year high inflation figure came on the back of price increases for food and recreational goods as well as transport costs, which fell by less than they did a year ago.

Inflation in August had stood at 2.9%. The UK had not registered inflation as high as 3% since March 2012, the ONS said.

A London-based financial analyst at investment fund BrickVest said the “relative economic strength” shown by the UK post-Brexit vote was beginning to wane as prices bite consumers disposable incomes, predicting the high inflation figure would put further pressure on the Bank of England (BoE) to increase interest rates this year.

“For the commercial real estate industry, higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices,” said Emmanuel Lumineau, CEO at BrickVest, a fund which specialises in real estate.

“We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market.”

The eurozone’s (19 countries) inflation remained stable at 1.5% in September, while that of the 28-country EU edged higher to 1.8%, up from 1.7% in August, according to the European statistical agency Eurostat.

“The largest upward impacts to the eurozone annual inflation came from fuels for transport (0.20 percentage points), restaurants & cafes (0.15 pp) and tobacco (+0.10 pp), while social protection (-0.05 pp), telecommunication (-0.04 pp) and vegetables (-0.02 pp) had the biggest downward impacts,” said Eurostat.

Among the major economies, Germany’s inflation mirrored that of the eurozone at 1.8% in September, unchanged from August, while France’s stood at 1.1%, an increase from August’s 1%.

The third and fourth largest economies within the eurozone, Italy and Spain, posted inflation in September at 1.3% and 1.8%, respectively. In both countries inflation decreased compared to August, from 1.4% in Italy and from 2% in Spain.

Outside the eurozone but within the EU, prices in Poland – the largest economy in eastern Europe - also edged higher in September to 1.6%, up from 1.4% in August.

In related news, the UK’s Prime Minister Theresa May travelled to Brussels on 16 October to meet European Commission President Jean-Claude Juncker to, according to analysts, get over the impasse in the Brexit negotiation.

The EU’s Council – the heads of government and state – is due to meet later this week to take a decision on whether there has been enough progress to pass onto the next state of negotiations: trade arrangements post-Brexit as well as the adaptation transition period proposed by May in Florence in September.

The EU has continuously demanded from the UK a clear position in three key issues before starting trade talks.

The EU wants to resolve what has come to be called the “divorce settlement”, which would see the UK and the EU27 agreeing on citizens’ rights, the money the UK would have to pay to settle its financial commitments and the Irish border, which will be the only land border with the EU post-Brexit.

“UK PM May flew into Brussels yesterday and had a ‘broad and constructive’ working dinner with Juncker, where they reviewed the progress made so far and ‘agreed that these efforts should accelerate over the months to come’, but fell short of delivering a tangible break through,” said London-based analysts at Germany’s investment bank Deutsche Bank.

“Elsewhere, according to EU officials (per Bloomberg), both Germany and France wants to toughen the tone on the summit declaration. This follows phone calls between PM May with Merkel on Sunday and France’s Macron on Monday.

“However, there is some optimism, as according to a draft paper prepared by Germany’s Foreign Ministry, it is working on proposals that include calls for the ‘comprehensive free trade accord’ with the UK.

“So with all this bubbling along, we await for the EU summit later and see who blinks first,” concluded the Deutsche Bank analysts.

Pictured: A fishmonger at a UK supermarket. Rising food prices put pressure on the country's overall inflation
Source: Mikael Buck/REX/Shutterstock

By Jonathan Lopez