Although many were hoping for inflation to ease off, the CPI (Consumer Price Index) held steady at 3% last month according to the Office of National Statistics, with prices increasing across all categories of spend.
Annual price increases coming into effect
The start of January is a time of year when many businesses put through prices increases. This year we expect price increases were at their highest level of recent years due to two key, related, reasons:
1. General inflation is now at its highest since mid-2013
Company costs have been pushed up and are a key reason that companies need to raise their own prices. James Brown, Partner and head of the UK Consumer & Retail practice commented “This wasn’t as convincing an argument in previous years. Last January inflation was only 1.8% and the two years ago it was almost 0%. With CPI now hovering around 3% for the last few months, using inflation as a justification for increasing prices is now far more compelling and warranted.”
2. Post referendum cost impacts are still filtering through
After the referendum and the sudden drop in the value of the pound, many companies actually held off price increases – they had short to mid/term protection through hedging or contracts, and simply delayed action with a “wait and see” approach. Companies can no longer afford to have their profit margins squeezed and so many feel a need to raise their prices. Additionally, price increases are not always immediately visible, but also come in the form of reduced promotions and ‘shrinkflation’ – where the product gets smaller but the price remains the same.
Motorists continue to feel the pinch
Although the increase in petrol prices were lower than those seen in January last year, motorists will still be feeling the pinch as the prices at the pump has continued to rise recently. James Brown commented “In January 2018 it cost a family £3.90 more than it would have at the same point last year to fill up their 60 litre family car and a whopping £11.64 more than it would have in January 2016.”
Want to know more? Read our previous Inflation Bulletins