The pound’s sharp drop following Britain’s vote to leave the European Union is starting to weigh on companies, particularly manufacturers, by increasing the cost of the imported raw materials and goods they require to do business.
Official figures released Tuesday showed that producer prices jumped 4.3 percent in the year through July, compared with a 0.5 percent drop in the year through June as the cost of imports soared due to the pound’s decline.
Commodities like oil, metals and grains are priced internationally in dollars, against which the pound has fallen 14 percent since the June 23 referendum.
Higher costs for manufacturers will pinch companies’ profit margins and eventually mean a higher cost of living for consumers, said Scott Corfe, director of the Center for Economics and Business Research.
“The sharp decline in the value of (the pound) since the Brexit referendum will translate into higher prices for imported goods over the coming months, pushing inflation to above 2.5 percent in the first half of 2017,” he said in a written analysis of the figures.
Increased inflation and stagnant wage growth mean workers are likely to feel the pain.
“The U.K.’s strongly consumer-driven economic recovery is about to grind to a halt,” he said.
In the days before the vote, the former chiefs of four of Britain’s biggest retailers told the Mail Sunday newspaper that it would be impossible for Britain to exit the EU without seeing a rise in prices and inflation.
It is too early to see signs of the impact of higher import costs in companies’ earnings. That’s mainly because the latest reports were mostly for the three months through the end of June. Also, many companies have financial investments that aim to protect them from shifts in currencies, though the pound’s drop was unusually sharp.
A separate report from the Office for National Statistics showed consumer prices also rose more than expected in July, to an annual rate of 0.6 percent from 0.5 percent in June, though that was not directly related to the EU vote.
The increase was caused by more expensive motor fuel and second-hand cars. Analysts had expected the rate to remain unchanged at 0.5 percent.
The inflation figures are important in that they are the first since the June 23 referendum to leave the 28-nation bloc. Surveys published earlier showed a sharp fall in business activity since the vote.
Some economists expect Britain to fall into recession, defined as two quarters of economic contraction. Others believe it will be a more moderate decline. The uncertainty is high enough that the Bank of England unveiled this month a package of stimulus measures to boost confidence.
What matters now, experts say, is whether the downbeat economic data and increase in prices are confirmed over time.
“As with all new information so close to the referendum, we must still treat it with some degree of skepticism as the country remains in a dust-settling mode after the material magnitude of the outcome,” said Clive Black, analyst at Shore Capital.