What does the inflation rate increase mean for your business?
The first post-Brexit governmental data has now been released by the Office for National Statistics in the form of the July 2016 Consumer price inflation report.
The release confirmed a rise in inflation rates of 0.6% meaning that they are now at the highest level since November 2014. Placed in a wider historical context, the rise is minimal, merely appearing high due to 2015 being a year of historically low inflation.
With many quick to blame the EU Referendum for the increase, Mike Prestwood, head of prices at the ONS was quick to comment that “there was no obvious impact on today’s consumer prices figures following the EU referendum results though the Producer Prices Index suggests the fall in exchange rate is beginning to push up import prices.”
It is true that the recent depreciation of sterling is largely to blame for an increase in import prices, a cost which will ultimately then be passed on to the consumer.
In addition to a poor exchange rate, transport costs increased by 1.6%, alcohol and tobacco prices also rose by 0.5% and Hotels and Restaurants also contributed, seeing a rise of 0.4%.
These statistics are all very well and good, but what will the news mean for small business owners nationwide, who are already feeling the pinch post-Brexit?
Rising transport costs will put pressure on workers
An increase in motor fuel prices resulted in the CPI seeing a 1.6% increase in transport costs. This is bad news for commuters as regulated train fares are now set to rise even more.
PWC were one of the first to comment on this claiming the statistics were “bad news for hard pressed rail commuters”, pointing out that rail fare regulation is still based on the old Retail Price Index which, due to its inclusion of housing costs, is always higher than CPI. This means that regulated rail fares are set to rise by 1.9% by January 2017
For business owners this will affect both current and potential employees. Current employees who rely on the rail network for their daily commute will notice a decline in disposable income and it may even encourage those with a longer commute to seek jobs closer to home.
For potential recruits, the increase in travel costs may reduce the talent pool to those in the locality. While this may not prove to be an issue for businesses based in areas with a dense residential population, others that are located off the beaten track may start to struggle.
Real wages may be an additional cost to business owners
Linked to rising travel costs, an increase in prices more generally will mean that real wages could suffer if businesses cannot afford to keep pace.
This is certainly the view held by Kallum Pickering, of German bank Berenburg, who compared the current situation to that seen during the euro crisis in the Guardian yesterday; “During the euro crisis, nominal wage growth slowed to less than 1% year-on-year. With inflation rising to at least 2% target by early next year, real wages will probably decline during 2017.”
However, this threat to real wages should not be over exaggerated. The package of remedies the Bank of England (BoE) announced when the interest rate drop was announced earlier this month has promised to stimulate growth and help create jobs which should give businesses some respite.
A weaker pound will continue to put pressure on importers
We are primarily a nation of importers when it comes to goods, and so the falling value of sterling was always going to cause an increase in prices. As a net importer of food, drink and fuel, it was inevitable that the price increases in these areas would be the driving factors to blame for the +0.6%.
The Producer PriceIndex highlights this more clearly than the Consumer Price Index. Producer prices have risen by 0.3%, the fastest rate in 2 years, with the cost of raw materials increasing by 3.3% confirming that UK firms are paying more for fuel and raw materials.
However, as soon as the ONS released its data, the pound rallied against the dollar, increasing by 1.3% to $1.3038. Could this signal that the worst is over in terms of exchange rates?
Former monetary policy committee (MPC) member Andrew Sentence, now at PWC, doesn’t think so. Commenting in the Guardian, he claimed that a trickledown effect will delay the full impact for up to a year, stating; “the big rise driven by a weak pound will take longer to come through – at least six to 12 months.”
So importers beware, it may get worse before it gets better.
Hopes will be pinned on the Bank of England to stimulate growth
The shining light for business owners may be the economic stimulus package that was announced by the BoE when they reduced interest rates to 0.25% this month.
Their aim to stimulate the economy and create jobs through $60bn worth of quantitative easing was designed to pump more money back into the economy, encouraging consumer spending as a result.
The prediction that inflation will now not only meet but exceed the 2% annual target means that a further interest rate raise looks less likely than before, but this does not mean that inflation will not rise further.
In fact, the BoE have admitted that they are willing to withstand a period of high inflation, in order to meet their growth goals and employment rate targets.
It is still too early to predict what the full impact of the EU Referendum on inflation rates will be, so businesses must remain vigilant and cut costs wherever possible to defend against rising prices.
One piece of good news included in the report was that electricity and gas prices remained “unchanged” but that does negate the fact that most business are still paying over the odds for their energy.
Are you one of them?
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