Inflation may have slowed in July, but it is still running at 3.1%, far in excess of the Government’s 2% target. Given that in the last month we have seen the price of wheat soar, the economy appears to be facing ever greater inflationary pressures. The consumer price index has now exceeded the 2% target for eight consecutive months. This pressure will be exacerbated still further in 2011 when the standard rate of VAT increases to 20% and rail travellers feel the full force of inflation busting fare rises, which could be as much as 5.8%.
Some commentators argue that these inflationary trends are positive for the economy, particularly in relation to eroding the national debt. However, many business owners will be concerned about the impact of rising costs and the pressure on their margins. Employees, many of whom have endured pay cuts and freezes over the past two years, will start to demand substantial wage increases to ensure their income in real terms is not eroded further. In addition, the pressure on materials and overheads keeps rising. Many firms can ill afford a chill winter given the cost of heating bills, unless of course they operate in the retail sector where firms will be desperately hoping that people invest in a warming winter wardrobe. While many firms were proactive and slashed costs prior to the credit crunch, which in many cases facilitated their survival, one has to wonder just how much more cutting of margins can continue.
However, traditional solutions to inflationary pressures may also leave business owners with sleepless nights. Traditionally reducing inflation has meant raising interest rates, which would be extremely worrying for many business owners and operators running loans and overdrafts. The message for the business community is clear: assess your cost bases and double check your company forecasting unless you wish to face a winter of discontent.
Do you believe inflationary pressures are negatively impacting the economic recovery?