Consumers are facing a difficult year ahead of higher prices and lower wage growth following the collapse in the value of sterling, according to a new report by BDO LLP.
Inflation caused by the increasing cost of goods following sterling’s post-EU referendum slump now sits at its highest level in BDO’s Inflation Index since mid-2013.
In the latest Business Trends Report by BDO LLP, the index climbed to 102.8 in October from 102.1 in the previous month, and is now almost three points above the long term trend of inflation at 100.
Increasing inflation is expected to continue in the coming months as the price of goods from overseas markets adjusts to the lower value of sterling. The sharp rise in inflation is set to outpace wage growth and will result in consumers having less to spend in the coming year, said the accountancy firm.
In addition to ailing consumer spending power, the low value of sterling has knocked the confidence of UK businesses. BDO’s Output Index, which indicates how businesses expect to perform in the three months ahead, shrank to 96.6 from 96.9.
The firms Optimism Index which indicates how firms expect their order books to develop in the coming six months has also fallen to 98.5 from 99.5. Both optimism and output indices remain in growth territory sitting above 95 but are below the long-term average at 100.
The latest findings suggest that UK economic growth will continue to slow, as the government attempts to agree its strategy to leave the European Union.
BDO's latest results coincide with research from the Confederation of British Industry (CBI), which also said the economic performance is set to weaken in 2017, as rising inflation affects household spending.
The CBI decreased its Gross Domestic Product (GDP) growth forecast to 1.3% from the 2% that was predicted in the previous forecast in May 2016.
Peter Hemington, Partner, BDO LLP, said: “Rapidly rising inflation is quickly going to hit the pockets of UK consumers, affect the profit margins of UK businesses and ultimately slow the growth of the UK economy.
“The Nissan and Hinkley announcements are a positive start post-Brexit, but the government needs to inject greater confidence back into the UK economy. We need a positive Autumn Statement that highlights immediate investment in infrastructure to help soften the blow to both consumers and businesses, and to encourage growth.”