Chart of the Day: Imported Inflation into the UK

Our chart for the day is linked to the news that the pound has fallen to an historic low against the Euro. One of the consequences of a depreciating currency is that the prices of many of the goods and services we import from overseas goes up potentially leading to a fresh burst of cost-push inflation.

Most internationally traded commodities are priced in US dollars, so the recent strength of sterling against the dollar has, to an extent, helped to keep these prices in check. But our chart clearly shows the sharp upward movement in the annual rate of inflation for imported foods and materials coming into the British economy. Imported food price inflation is running at 18 per cent and materials are 14 per cent more expensive than a year ago. Manufacturing output price inflation has accelerated from just over 2 per cent at the start of 2007 to nearly 6 per cent now, as producers have had to pass on some of these higher variable costs to their customers.

The rise in imported inflation is one of the problems facing the Bank of England when setting interest rates. If they cut interest rates too quickly and prompt a further depreciation of sterling, the inflationary pressures coming from products entering our ports and airports will get worse.

PowerPoint Chart
Chart_of_the_Day_(Import_Prices).ppt