Blog: Dean BestPricing pressure in the UK

Dean Best | 18 May 2010

News today (18 May) that inflation in the UK accelerated in April has prompted further anxiety over the economic outlook for the country.

A key measure of inflation in the UK, the Consumer Prices Index, hit 3.7%, the highest level since November 2008.

The data, issued by the Office for National Statistics, suggested that the price of food was a key factor.

The ONS figures said the upward pressure on food prices were "widespread rather than from one particular group".

There was also a suggestion that the disruption from the ash cloud from the volcanic eruption in Iceland had also pushed up food prices.

The inflation caused some surprise in the UK, where, at first glance, the economic uncertainty, pay restraint and rising unemployment should dampen prices. There is also some concern that the inflation numbers could make a hike in interest rates more likely - and derail the slow recovery in the UK.

However, there have been some indications from business, at least in the food sector, that there has been pressure on raw-material costs - not least from rising fuel costs and the weakness of sterling pushing up import prices.

Add to the mix the poor weather at the start of 2010 and you have the ingredients for pressure on prices.

Of course, with consumer confidence fragile, and with all the mood music from the new UK coalition promising severe spending cuts set to worsen consumer sentiment, the prospect of food processors succeeding in getting their retail customers to accept higher prices is far from certain.

And, as we discussed yesterday, there is the spectre of a VAT increase hanging over the economy. Today's inflation data could dampen any calls for a VAT hike, although perhaps the deficit is so wide that an increase in VAT is inevitable.


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