Rising inflation may increase business costs

Wednesday 14 November 2012

City of London

UK inflation rates increased during October 2012, potentially increasing the costs faced by businesses.

According to the Office for National Statistics, annual CPI inflation rose from 2.2 per cent to 2.7 per cent, while annual RPI inflation increased from 2.6 per cent to 3.2 per cent.

David Kern, chief economist at the British Chambers of Commerce (BCC), said this increase was larger than expected.

He attributed the rise to higher university tuition fees and upward contributions from food, non-alcoholic drinks and transport.

"With higher utility prices now in the pipeline, it is possible that annual consumer price inflation will rise again above three per cent in the next few months, before falling during 2013," Mr Kern stated.

He said higher inflation is "unwelcome news" for the UK economy at a time when the government is persevering with its tough austerity plan.

"In the face of major economic challenges, there is only limited scope for the UK to rebalance towards exports and investment over the next year," Mr Kern added.

In these circumstances, the boost to real incomes resulting from low inflation could be one of the main factors for underpinning domestic demand in 2013, he stated.

Mr Kern offered the view that the Bank of England should not use additional quantitative easing to limit expected falls in inflation over the coming months.

Even if it falls temporarily below the two per cent target in 2013, this should not be resisted, he added.

"Instead, the Monetary Policy Committee and the government should concentrate on measures that support growth directly and boost lending to businesses," Mr Kern added.

Posted by Steve Williams