As inflation hits two year highs, the prospect of more to come is rising

Who would have thought that one of the main headlines from last week would be about a traditional British staple and its availability on supermarket shelves?

Who would have thought that one of the main headlines from last week would be about a traditional British staple and its availability on supermarket shelves?

Last week’s spat between Unilever and supermarket giant Tesco about the cost of Marmite amongst other products shines a light on one of the inevitable consequences of a lower pound, though the fluctuation in petrol prices over the years has meant UK consumers are well aware of the effect that exchange rates can have on the cost of imported goods.

While in this instance the behaviour of Unilever in seeking to hike its prices was highly questionable given that most of the products in question are made here, it nonetheless gives us a flavour of what to expect in the coming months as higher import costs start to trickle down into the supply chain.

Over the years we have become used to falling prices as the traditional supermarkets fell victim to increased competition as well as a price war from more nimble competitors, and a more price sensitive consumer.

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Given recent developments the scope for lower prices does appear to be coming to an end, and that has been reflected in recent inflation data, which has been on a slow rise for most of this year since turning negative at the end of last year.

The current rate of UK consumer prices now sits at 1%, though it is the less used retail prices index that tends to more accurately reflect the pound in the pocket of the average man or woman in the street, and that has just hit 2%, for the first time in a couple of years

This week’s inflation numbers have continued to reflect this uptrend in prices, but importantly they haven't as yet significantly moved above the 2% level quite yet, on the RPI measure.

With average earnings still trending above 2%, the gap between prices and wages are still on the right side of the equation as far as the disposable income gap is concerned, which tomorrow’s wages data should confirm, however it does look likely to narrow further as we head towards Christmas.

For almost two years now average earnings have been rising faster than inflation, giving a welcome respite to consumers who five years ago today saw annual inflation peak at 5.2%.

As we head towards year end it is becoming increasingly likely that the boon of wages rising faster than inflation that we’ve seen in the past two years could be about to come to an end, particularly since UK 5 year forward inflation expectations have risen rapidly towards the 3.5% level in the last few days, from just below 3% at the beginning of August.

That would suggest that the earlier you do your Christmas shopping the better, particularly as the costs of imported goods aren’t likely to come down too much in price over the next few months, though companies would be well advised to tread more carefully given the reaction to Unilever’s clumsy attempts at what can only be termed as price gouging.

If consumers are smart this should be good for retail sales over the next few months in trying to get ahead of any potential price increases, however it is likely to make life that much more difficult for retailers as their margins get squeezed further, and this will impact their profitability, and could prompt further rationalisation.

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