Inflation fall treated with caution by business leaders

THE fall in inflation to 4.8% has been greeted with caution by business leaders in the West Midlands. Birmingham Chamber of Commerce Group said that despite the fall, inflation was still running at twice the level targeted by Government and well ahead of most salary increases.

Michael Ward, president of the chamber, said: “The drop is not what we anticipated and it still remains high.

“It does put businesses under pressure, and cuts into margins.  It is imperative the Government acts decisively to create the best possible environment for jobs and growth.”

Inflation is still being driven by the rising cost of electricity as well as the price of petrol, which despite deferred duty is still too high and affects transport costs and the cost of consumer goods, he added.

“We are renewing our call on the Bank of England Monetary Policy Committee to hold its nerve and not increase interest rates.  Although inflation hurts business, low interest rates are benefiting them, especially the worst hit manufacturers,” said Mr Ward.

Andrew Goodwin, senior economic advisor to the influential Ernst & Young ITEM Club, was a little more optimistic and said the figures were another step on the road to recovery.

“This is bang in line with what we had expected. We’re in the early stages of a move back to the 2% target, a move which should gather pace over the next couple of months as some of the temporary factors – notably the VAT rise – begin to fall out of the year-on-year calculation,” he said.
 
“Significantly, we are beginning to see the effects of movements in global commodity prices being reflected in the prices charged in shops. Surging global food and oil prices were responsible for a significant chunk of this year’s high inflation rates, but these have now stabilised as the global economy has slowed. As a result, they are exerting less pressure on domestic inflation than they were before. At the same time, we are increasingly seeing retailers being forced to discount, as they try to support sales in the face of very weak consumer demand.”
 
He said the ITEM Club expected CPI inflation to fall back to the Government’s 2% target by next autumn, as the temporary factors influencing the rate dropped away one-by-one.

“While we are not convinced that it will fall back as far as the Bank of England forecasts, the prospect of a period of below-target inflation should still provide plenty of room for the MPC to loosen monetary policy further in 2012, if conditions remain as weak as they are now,” he said.
 
“This will also provide some welcome respite for hard-pressed families who have struggled with falling real wages for much of the past four years. Currently households’ spending power is falling by around 2.5% a year in real terms but, with inflation set to slow sharply, this should reverse by the end of next year.”