BDO flags-up inflation worry

INFLATION is likely to remain above target during the rest of this year and will drag on consumer spending, accountants BDO predict.

The firm’s Business Trends result detected a tail-off in the decline of inflationary pressures in April. This combined with poor results in its Output and Optimism indices point to a sluggish recovery.
 
BDO’s Inflation Index dropped by just 0.1 points in April, suggesting that the downward trend in inflationary expectations over the past nine months is coming to an end.

The firm’s Inflation Index is at 102.9, above the average trend level of 100, suggesting that inflation is unlikely to reach the Bank of England’s 2% target by the end of the year.
 
BDO says: “These inflationary pressures, compounded by low growth in regular annual earnings at just 1.6% – below the inflation rate – are critically undermining consumer spending power, a key contributor to economic recovery.”
 
Jeff Jones, head of BDO’s Manchester office said: “Given the public sector austerity measures required to reduce deficits, policy makers across the globe have reached for unconventional monetary policy tools to encourage growth. However, the UK has shown stubbornly high inflation and our findings suggest that business people predict inflation will continue above target – potentially a self fulfilling prophecy.

“Some economists believe that the Bank of England should convince businesses and consumers that it is prepared to tolerate inflation. The thinking is that only this will convince consumers to spend and businesses to invest, as the alternative is to see the value of their cash assets decline.

“If this is the strategy, then it may be the right one.  But it has not been articulated as such and the concern is that every day inflation continues above target, the Bank loses more credibility and has less room for manoeuvre.”