Weak Pound Could Fuel British Inflation

Retailers hit by rocketing import costs will pass on about £10bn of price rises to British consumers this year, according to new research.

PricewaterhouseCoopers (PwC) said the price rises could usher in the first non-food inflation for a decade and deal a body blow to any recovery in consumer spending.

Mark Hudson, retail leader at PwC, said: "When UK consumers are watching their spending closely and consumer confidence appears to be improving, the last thing shoppers need is price rises. Since retailers' margins are so tight, these extra costs will potentially spill over into the prices consumers are asked to pay."

Over the coming year, non-food retailers could be exposed to more than £20bn of extra costs as a result of sterling's weakness against the dollar and euro, according to PwC.

While retailers have managed to mitigate about half of these additional costs—through negotiations with suppliers and the wider fall in commodity and transport costs—they will still have to either absorb themselves, or pass on to consumers, about £10bn in price rises; equal to 5 per cent of the non-food UK retail market. In particular, the weaker pound against the dollar has led to a hike in non-retailers' import costs, as they source the majority of their products from dollar-denominated Asian economies.

The accountancy giant expects price hikes on items such as clothing and food to kick in next month, although a few retailers such as Debenhams (DEB.L) are protected by longer hedging periods.

The chief executives of fashion retailers Next (NXT.L) and New Look have already said the weak pound will lead to price rises in the second half. Last week, Argos (HOME.L) stuck to its earlier forecast that the weak pound could add as much as 10 per cent to its sourcing costs, leading to price rises.

Mr. Hudson said he expects retailers to try and "disguise" the price rises by spreading them across their product range, but not on the cheapest entry-level products.

Alternatively, retailers can absorb the £10bn of additional costs into their margin, or reduce the quality of input materials, dubbed "despecking". This is less likely as retailers don't want to ostracise customers.

Mr. Hudson said that a price hike this year will reverse a decade-long cycle of declining non-food prices. "This is where the cycle stops and there might be the return of inflation in the non-food sector," he said.

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