LONDON: The pound's sharp drop following Britain's vote to leave the European Union is starting to affect companies, particularly manufacturers, by increasing the cost of the imported raw materials and goods they require to do business.
Official figures released today showed that producer prices rose 4.3 per cent in the year through July, compared with a 0.5 per cent drop in the year through June as the cost of raw materials increased due to the pound's decline in the wake of the EU referendum.
Commodities like oil, metals and grains are priced internationally in dollars, against which the pound has fallen 14 per cent since the June 23 referendum.
Higher costs for manufacturers will translate into a rising cost of living for consumers in the months ahead, 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, combined with stagnant pay 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.
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 per cent from 0.5 per cent 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. Economists had expected the rate to remain unchanged at 0.5 per cent.
The inflation figures are important in that they are the first since the June 23 referendum to leave the 28-nation bloc. Economists suggest that what matters most is whether a pattern emerges 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," Clive Black of Shore Capital wrote.