Any British shoppers tempted by Apple’s new iPhone are having to dig deeper into their pockets after June’s Brexit vote as the US tech giant raised the sterling price by £60 ($76) when the model went on sale on September 16.
While US customers will pay the same as last year, the 11% price rise for Britons from the previous model almost exactly matches the amount by which the pound had fallen against the dollar since the vote to leave the European Union.
Yesterday, sterling slid to a new 31-year low, meaning many other retailers are likely to follow Apple, putting a dampener on five years of solid growth in consumer spending that has powered Britain’s recovery since the financial crisis.
But few consumers seem aware of what is coming, according to one survey of household expectations.
Higher inflation — along with a rise in unemployment and slower wage growth — could reduce growth in household spending to just 1% next year, the Bank of England has said.
That would be just one third of its pace in the past year.
“We know there is a big inflation shock coming from sterling’s depreciation, so it looks like households’ real income will grow only very modestly next year,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Even before the referendum, households had seen disposable income grow more slowly, and they were saving the smallest percentage of income since 2008 to bridge the gap.
The question now is how rapidly other retailers follow Apple and raise prices. So far the picture is mixed.
Associated British Foods, which owns discount clothing retailer Primark, told Reuters it intended to absorb the higher cost of imports through its profit margins, to maintain its position as a bargain destination. By contrast, fashion chain Next said it would pass on higher costs to consumers, but not until the spring of 2017 when hedges it took out against currency weakness expire.
Next — one of Britain’s biggest clothing retailers — has estimated that the weaker pound will push up its costs by 5% next year if it cannot find cheaper suppliers.
Based on its experience in 2010, after sterling’s last big fall, passing a 5% price rise on to shoppers would reduce the volume of sales by 5.5% — but lower revenue by just 0.5-1.0%. “In the scheme of things, we think that this drag on sales is manageable and less damaging than taking a significant hit to margin,” Next told investors.
Firms across Britain will have to make similar choices. The average cost of imported goods in August was 7.6% higher than a year earlier, the sharpest year-on-year rise since 2011. The BoE estimates about 60% of cost increases caused by a weaker currency are passed on to consumers although there are exceptions in highly price-sensitive sectors.
Grocery prices, for example, have fallen over the past two years as the four main supermarket chains — Tesco, Sainsbury’s, Asda and Morrisons — compete against German discounters Aldi and Lidl.
None is likely to want to be the first to break ranks and raise prices.
Sainsbury’s has said lower global commodity prices mean prices might not rise at all, although on Wednesday bakery chain Greggs said it faced higher costs. Last month the BoE said it had heard some food companies were trying to use cheaper recipes. Overall, the BoE forecasts inflation will be slower to rise than most private-sector economists, but that it will stay above target for longer, predicting an increase to 2% by the end of next year and 2.4% in late 2018 and 2019.
This is a big jump from inflation of 0.6% now and represents the BoE’s highest ever medium-term inflation forecast. A further risk is that the start of formal talks to leave the EU next year will revive public concern about the impact of Brexit, said Zoe Mills, an analyst at Verdict Retail, which advises big stores and suppliers.
“Sentiment is likely to dip again, negatively impacting retail spending,” she said, predicting discretionary purchases such as electrical goods and home hardware would be worst hit.
Car sales to consumers have already fallen slightly.
That said, British consumer demand has historically proven a more reliable source of growth than business investment or exports, both of which face challenges from uncertain EU ties.