Inflation and Business - A Warning

On the 12th February 2008 Mervyn King the governor of the Bank of England warned in an address to the CBI of increased inflation in the year ahead. Although he predicted that the deeply suspect CPI was likely to rise above 3% he conspicuously failed to put a number to it.

A week later Ms Lomax, the deputy governor in an address to the Institute of Economic Affairs warned of people not recognising the 'temporary nature' of the current inflation and went on to tell price and wage setters 'not to expect higher inflation to persist': When she refers to wage and price setters she is talking about businesses.

This is pure spin on her part. Last year for example the price for nickel rose by 60%, tin by 86%, lead by 155% and oil and plastics by 200%: and the costs of these and other materials are still going up. Meanwhile wage inflation in China is running at 7% and counting. The price deflation of goods from there is now a thing of the past; their prices are being forced up too.

To make matters worse, the pound is down from its November peak against a crisis ridden dollar by 5% and against the Euro it is down by 14%. Bloomberg among other commentators expects this to get worse in 2008 with a $1.80 rate for the dollar forecast as the year progresses. Therefore even if oil for example were to stabilise at its current price, a devaluation of that order adds up to a further increase of 10% on what it is costing us today.

Pressures on wages are also going to be inevitable in 2008. The recent budget has taken no account of the effects of higher food and fuel costs to which must be added average rises in council tax of just under 5% plus higher taxes for the low paid. This year’s inflation will add to this and it should be noted that even the Governor of the Bank of England himself has warned of a fall in the standard of living this year. This is not something that people are going to take lying down; most certainly where the trade unions are concerned.

This adds up to sharply higher prices for goods and services this year. In fact a devaluing pound could also mean that interest rates may have to start to rise at some point. It is the case that if you take on board Ms Lomax's concerns and hold your current prices, you will be putting your business in jeopardy. Your principal focus this year must be on preparing to cut your overheads and expenditure and to take action to protect your gross profit margins.

It is at times like this that you also have to rethink your planning. You can rest assured that your business bank manager will most certainly be looking for evidence of this. When planning with Figurewizard your priorities must be to keep your margin at its present level and reduce overheads. If you are involved in the sale of goods however you should also be rethinking your stock levels while running a fine toothcomb through your sales ledger. Business failures are forecast to rise and it will be important to limit your exposure to persistently slow payers therefore.

One good thing about all this is that all of your competitors are in the same boat. It will be the ones who fail to plan for what’s coming who will not be around for much longer.

© Figurewizard.com ltd. This article may not be reproduced without our express permission

This article was updated 19th March 2008

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