Why UK Inflation Will Increase in 2010
Economics / Inflation Apr 12, 2010 - 08:50 AM GMTBy: John_Cardy
The 'expert' economists tell us that Inflation is not a risk to the UK. They say it has risen but will decline again fairly quickly and everything is under control. But it's not. Ask real people running real businesses and they will tell you there a host of reasons why inflation will increase:
1. Sterling has declined. The pound is down against the dollar. The world is now truly global, and much of the world production is in the Far East priced in dollars. Even UK manufacturers often price in dollars now. When the pound goes down, then raw materials, finished goods and components become more expensive.
2. China has Inflation. The recession hit China, with reduced growth, but now things are booming there. Shortages of labour are common. Some factories closed. The remaining ones are struggling to keep up with demand.
3. Demand in the short-term is boosted by stock fill. The world reacted to the recession by reducing stocks. Now, as we grow again, we are all increasing production, but also increasing stocks. Demand for Far Eastern production is therefore amplified, and WILL mean price increases to manage demand. Cost prices are reportedly already increased by 25% on some Outdoor Toy large items this Spring, excluding the Shipping and Currency increase.
4. Shipping has increased. The theories that economists have in their models are based on history, they have missed the fact that we are so dependent on Far Eastern production, Shipping Costs have gone mad. They are now higher than last summer, but only around double the summer of 2008. I do not expect shippers to increase capacity too fast; rather they will take some margin first.
5. Staff demands for Rises. Costs are up for real people. Living IS more expensive. Fuel, Council Tax, and shortly NI and other taxes to rise. Many companies responded to the recession with restrictions on pay. After nearly 2 years, the pressure to increase pay will be immense. And it will not be resisted. Prices WILL rise.
6. Petrol is up. Partly worldwide demand, partly sterling and partly tax, petrol is up, and is high and will get higher. It’s at near its previous peak, but the last time it was at £1.20 per litre, Sterling was at around $2, now with sterling at $1.50, if the price of a barrel gores up to near the previous peak of $140 then there is no option, Petrol will increase dramatically. This increases all kinds of costs, from deliveries, to power. And people will notice, driving the demand for higher wages.
7. Vat increases. An incredible number of retailers have absorbed all or part of the Vat increase from January. This has helped to keep inflation down so far, but has slimmed margins. It has effectively taken some of that economists slack out of the economy. Retailers will not be able to resist taking some increases soon.
8. It’s easy. Once in the habit, increasing prices is easy. Recently it’s been hard to increase. Customers question it all the time. When everyone is doing it, and justifying it, it becomes the norm. Have you seen the almost constant letters from suppliers already advising of abnormal pressures that mean prices 'have to go up'? Soon it will be normal. When it is, prices go up faster and more quickly. I remember in the 1980's when all of our profit came from the price increases. And that meant we did them twice a year. Don’t rule out multiple price increases.
9. Businesses are smarter. Government and BOE are surprised by how business has behaved in this recession. Business failures and staff cuts are much lower than expected. I am not surprised, business have got smarter. They have done innovative things like cut hours, rather than cut jobs, so they can keep skills. So, expect innovation on price increase. They will not be increases, they will be surcharges. So, your will have seen WEEE surcharge, The Credit Card Processing surcharge, the variable Fuel surcharge - that goes up and down in theory, and as Government increases taxes, you will see them passed on as 'Tax surcharge'. We even had a supplier try a 'Working Time Directive Surcharge' because they had to give a rise to staff!
So, overall inflation is VERY real. The BOE believes it will be back below 2% in Q3. Nonsense. It will not happen. Wait and see. Today Producer prices and input prices are all up. We knew it would be. And for the reasons above, it will continue.
There is only one solution. Push up Interest Rates. Not to take money out of the economy, but to boost Sterling. Boosting Sterling will alleviate the imported pressure of many of the above, but would also have an impact on demand. It's Risky. It would increase costs for UK mortgage payers, but might put some money in to the pockets of people with savings. A tricky dilemma, I'm glad I am not faced with.
But, believe me, Inflation is here and strong, unless Sterling can recover. I think the Bank of England will be looking at todays figures and perhaps start believing too.
John Cardy is a Director of a UK based Outdoor Toy manufacturer, selling Trampoline Products and Climbing Frames. He writes trampolineman.wordpress.com a blog about life running a small business in the UK. He believes that people running real business have a more instinctive and instant view on what is really happening day to day and a better grasp on what the issues are than expert economists and politicians.
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