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Doubts rise over whether UK retailers can absorb the Brexit price hikes

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A number of British retailers might have promised not to increase prices despite concerns of rising inflation, but analysts have told CNBC that such guarantees are unsustainable and they predict that costs will start to go up in the next six months.

"Many retailers will have to increase prices in the first half of next year to respond to a falling sterling," Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, told CNBC on Tuesday.

This comes after famous main street names in the U.K. - such as Marks & Spencer and Tesco – promised to absorb any price rises in the coming months. The depreciation of the British currency in the wake of the Brexit vote has increased import costs for retailers and led to some price wars with suppliers. Last month, British consumers could not buy Marmite online from supermarket chain Tesco, after Unilever asked the grocer to increase prices.

On Tuesday, the owner of Toblerone chocolate bars announced it was reducing the size of two of its bars due to increased ingredient costs. Though Mondelez International did not specifically blame Brexit for the changes, Tombs said it is already evident that certain brands have already increased prices to offset costs from currency fluctuations.

Data released last month showed U.K. annual inflation rose to its highest level since late 2014. Inflation went up by 1 percent year-on-year and the Bank of England last week revised its inflation forecasts for 2017 from 2 percent to 2.7 percent.

"In a world of sluggish nominal wage growth and low rates of return on savings, (rising inflation) is especially bad," Kallum Pickering, senior U.K. economist at Berenberg investment bank, told CNBC via email.

"While prices for imported goods such as fuel and food will be affected the most, households are unlikely to cut back on their consumption as these are essential goods. Instead, the rise in costs for these goods will eat away at the remaining income that would normally finance discretionary purchases such as leisure, retail, hotels and the like," Pickering added.


Matt Clinch | CNBC

Associated British Foods hopes to win from Brexit

However, the depreciation of sterling isn't bad news for everyone. The Associated British Foods group – which owns Primark, said Tuesday in its results report that Britain's departure from the EU was an opportunity for the food and retail group.

"Changes in legislation and trade agreements, particularly in the areas of trade tariffs and U.K. agricultural policy have the potential to benefit the group, and the current level of sterling offers U.K. food producers significant opportunities to replace imported food and build export markets," it said.

"We are therefore engaging with a number of U.K. government departments to ensure that the full range of opportunities and risks, as they affect ABF, are recognized," it added.


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