Inflation! Is the cure more harmful than the cause?

Latest update RPI for February rises to 5.5%, CPI rises to 4.4%.


Wow – we expected inflation to increase in December, but by 40 basis points is slightly alarming, and a further 30 basis points in January!

With the Bank of Englands target firmly set at 2%, CPI is now running at 4.0%  (up from 3.3% in November and 3.7% in December). RPI has now reached 5.1%.

So how do the Government intend on “controlling” inflation?

The main controlling mechanism is through increasing the Bank of England base Interest rate, which has been at 0.5% since March 2009. The concern is that an increase in this rate, will impact many areas of the economy, which could push the UK back towards a recession… the double dip on its way?

The risks of increased rates will kerb individuals spending, thereby slowing the economy in general. As mortgage rates, loan rates and credit card debt will become more expensive, individuals will have less to spend. Businesses will see their borrowing costs increase, together with the potential for reduced sales as consumer demand falls.

Inflation has increased the most on areas such as Heating Oil (up 48%), Air travel (up 13.5%) and Petrol/Diesel (up 12.9%) in the last 12 months. These categories have a significant knock on impact to all areas of the economy. Undoubtedly transport affects almost all businesses and certainly all consumers. This all means that costs increase for businesses and for individuals, meaning less disposable cash. This together with the rising prices of products consumed, such as food & drink, mean that individuals will feel the pinch in 2011.

The big question: Is the cure more harmful than the cause?

If Inflation is left uncontrolled, it could push the country back into recession. If interest rates increase, it could have the same effect.

In our opinion – the Bank of England will leave interest rates static for the next 6 months, preferring that the economy’s self control mechanism will kick in. Now that VAT has increased, people will have advanced spending into 2010, thereby demand will now decrease. If demand dips, the economy will naturally contract, thereby bringing inflation under control. All this together with the natural contraction in the economy, we believe inflation will correct itself if left alone.

We have been assisting many of our clients with pricing strategies and decisions. If you require a full and detailed analysis of your pricing, profitability by product, forecasts or sales analysis, please contact us for a free initial meeting.

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