Fears of higher inflation erode British consumer sentiment

Fears of higher inflation have started to hit British consumer sentiment for the first time since June's vote to leave the European Union sent the value of sterling tumbling, a survey of households showed on Wednesday.

Financial data firm Markit said its monthly household finance index fell to a five-month low of 43.8 in October from 44.7 in September. Concern about future inflation hit a 22-month high, with the index measuring expected living costs rising to 83.8, its highest since December 2014.

"For the first time since the vote to leave the EU, UK households saw a noticeable downturn in current finances during October," Markit economist Philip Leake said. "Inflation appeared to be a key factor behind the financial strain."

Sterling fell by more than 10 per cent against the dollar and the euro in the days after the June 23rd vote, briefly jolting household confidence but having little impact on purchasing power.

Record low

But this month there has been a further lurch lower in Britain’s currency, taking it to a record low against its main trading partners, down more than 15 percent on pre-referendum levels.

British consumer price inflation recorded its biggest jump in two years in September, data showed on Tuesday, and Markit's survey took place at the same time as a high-profile pricing dispute involving Britain's biggest supermarket, Tesco. Tesco temporarily stopped selling goods online from Unilever – including iconic brands such as yeast spread Marmite – after the food producer demanded a 10 per cent across-the-board price rise to compensate it for the increased cost of imports.

Bank of England policymaker Kristin Forbes said last week that inflation in Britain could sharply overshoot the Bank’s 2 per cent target over the next two years. Households were divided on monetary policy, with 27 per cent of households expecting the Bank of England to cut its base rate again, while 43 per cent anticipated a tightening within the next 12 months.

The Bank of England said in September it was likely to cut rates below their historic low of 0.25 per cent at its next meeting on November 3rd if the outlook for the economy remained in line with its assessment in August. But few economists now expect a cut, after some policymakers later said the economy had performed better. – (Reuters)