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, as at September 2008 the pound is down from its November 2007 peak against the US dollar by 16% and18% against the Euro. Bloomberg among other commentators expects this to get worse in 2008 with a $1.70 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 20% 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.
This article was updated 3rd. September 2008
© Figurewizard.com ltd. This article may not be reproduced without our express permission
Your Comments
My company imports some of its products from China. In January we were paying 5% more for our goods on average because of the pound dollar rate. Last month the factory put its prices up by 8% so now we are paying 12% more. This is general in our trade.
Comment by Paul Spicer
We bring in specialist food products from Spain and Italy. Since last year the price we pay in Euros has gone up by 14% so far on average and the pound has fallen by 16%. The result is that our landed cost prices are 34% up on 15 months ago. Where the hell the government gets 3% inflation out of this is anybodys guess.
Comment by Andy
What are you doing about the prices you charge here in the UK?
Comment by Figurewizard
we ran a test plan on figurewizard to see what the effect of cutting out the maximum overheads we could manage would do to our cashflow. This is because our profit margin has fallen by 5 percentage points due to higher costs. We barely made a dent in the problem though and it was only by increasing the margin back to where it should have been that we got the cash under control. This means our prices must go up by 7% and that is what we are going to have to do as well as cut out some of the overheads. Unless something changes we will probably have to put prices up again later on this year. If we listened to the bank of england on the other hand we would go out of business in a year.
Comment by crowman
Why is the government lying about inflation? 4% be buggered, its three times that and getting worse.
Comment by tb besley
Your prediction of a $1.80 pound looks like it will happen well before the end of this year. Bloomberg's forecast back in October of a $1.70 pound by the end of 2008 looks more likely, in which case there will have to be sharp increases in rates this autumn. Cuts are out now of the question.
Comment by hawkweed
The Bank of England cannot allow the pound to go below $1.80 however, which is why I agree that rate rises are much more likely than cuts in the second half of this year. On the other hand if the pound is allowed to fall below $1.80 in the absence of rate rises then it will be clear that it is the government that is calling the shots, making the Bank's independence nothing more than a sham.
Comment by Figurewizard
Our company imports stationery goods from China. A year ago $1000 worth of goods translated into a landed cost of £476. Since then the cost of these goods have risen by 10% to $1100 from China but thanks to the pound the landed cost has now risen to £621 which is 30% higher. If the pound does not recover by the ned of this year we will be out of business and twenty jobs will go with it!
Comment by cosimo
Have you slashed overheads and jobbed out redundant stock? You may think you have but at times like this you need to be brutal about doing so. As to your increased cost of goods, this is something all of your competitors will be suffering so once you have cut overheads to the bone put up your prices to recover your margin. After all what will you then have left to lose?
Comment by Figurewizard
I read in todays paper that the ons says that retail sales have risen by 4% between july and august. Where the hell do they get that from? We supply the retail trade and all of our customers are struggling. Some say that it has hardly been worth opening the doors this year.
Comment by carl
Why do the press bang on about the euro? The pound against the dollar is what counts for this country. The Americans have a habit of coming out of a recession a lot faster than we ever can. When that happens the pound will crash and that is when inflation really takes off over here.
Comment by oldboy
Funny reading comments re. pound/dollar exhange rate. Figurewizard said BoE couldn't cut rates if pound sank below $1.80. Well, it did and they did!!!! So much for experts. The government is in charge. We are well and truly screwed.
Comment by Bob H
To Bob H - I didn't say that the BOE couldn't cut rates in this article but to be perfectly frank I do believe that we are not going to be able to sustain them at anything like the present level. The pound / dollar rate is the one that matters because almost all materials, food and much of the consumer goods that we import are priced in dollars. The maths is simple. If you buy $1000 worth of something at $1.80 it costs 714 pounds (an increase of 29%). If the pound hits $1.20 it will cost 833 pounds (an increase of 50%). Both increases represent inflation with knobs on. Given the state of the recent budget a $1.20 rate is not beyond the bounds of possibility in 2009. And yes - With this government we are screwed.
Comment by Figurewizard
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