Inflation index declines 0.1 points in April

Cost pressures are undermining consumer spending power, says BDO.

By New Statesman Published 14 May 2012

The Bank of England, London. Credit: Getty Images

Inflation is unlikely to reach the Bank of England’s 2 per cent target by the end of 2012. Credit: Getty Images

The UK's inflation index reached 102.9 in April – a drop of 0.1 points, compared to 103.0 last month – in the latest monthly business trends indices prepared for the business advisory firm BDO by the Centre for Economics and Business Research (Cebr).

The current level of inflation, which is well above the average trend level of 100.0, suggests that inflation is unlikely to reach the Bank of England’s 2 per cent target by the end of the year. It also suggests that the steady downward trend in inflationary expectations seen over the past nine months is reaching an end.

BDO said that these inflationary pressures, compounded by low growth in regular annual earnings at just 1.6 per cent, are critically undermining consumer spending power, a key contributor to economic recovery.

The BDO employment index was 95.5 in April, an improvement of 2.7 points from 92.8 last month.

The BDO optimism index, which predicts business performance two quarters ahead, declined from 96.7 in March to 96.2 in April.

Meanwhile, the BDO output index, which points to business conditions in one quarter’s time, was 95.8, an improvement of 0.1 points from 95.7 last month.

Peter Hemington, partner at BDO, said:

Given the public-sector austerity measures required to reduce deficits, policymakers 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.

These indices are calculated by taking a weighted average of the results of the UK’s main business surveys.

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