UK inflation poised to jump

Bloomberg

On Tuesday, IHS Markit’s Purchasing Managers Index showed input prices rose to their highest level in five years, nearing a record high since the survey first began tracking business costs back in 1992. Hard UK inflation data has yet to show a big uptick in prices but a surge in input costs for UK manufacturers foreshadows the looming threat of inflation for UK businesses — as well as the Bank of England’s challenge in juicing the economy in the coming quarters while obeying its inflation target.
“The data highlight the impact of the large depreciation of sterling,” Daniel Vernazza, economist at UniCredit SpA wrote in a note to clients. “On the one hand, the depreciation of sterling supports UK exports as it makes them appear cheaper once expressed in foreign currency. On the other hand, the depreciation of sterling is significantly increasing the cost of (imported) inputs into the production process.”
The Purchasing Managers Index, one measure of output for the British manufacturing sector, eased to 54.3 in October. While that’s down from 55.5 in September, a reading above 50 indicates expansion and the figure remains above its pre-referendum level and the historic average. But the pound’s fall threatens inflation-adjusted output and business margins. Capital Economics reckons CPI inflation is poised to pick up “sharply” over the next few quarters, now that the pound, which has fallen 18 percent since the Brexit vote in June, is beginning to be felt by UK businesses.
In October, a survey by Confederation of British Industry registered increase in optimism among UK exporters, underscoring the relative resilience of the economy after the Brexit vote. However, 47pc of 231 firms surveyed said the pound’s fall was having a negative impact on their business, compared with 32pc who said it was positive, and 19pc who were neutral on the issue.