Businesses face inflationary pressures

Businesses are facing inflationary pressures according to the Bank of England (BOE).

Both the BOE’s chief economist Andy Haldane and its external monetary policy expert Michael Saunders have warned that the UK could be in for a rocky ride. Inflation in the US recently edged over 4 percent, the highest level since 2008.

Where will it land?

Speaking to MoneyWeek magazine, Haldane said that the BOE currently predicts inflation will hit about three per cent this year. He ruled out double-digit inflation. But he warned: “Nor do I think it’s nailed-on that three-and-a-bit will be the high-water mark.”

The pressure on inflation is coming from several sources – including rising energy costs, bottlenecks in the supply of labour and goods, and from wage demands.

As a result, businesses could face a “nasty surprise” if the Bank decided to rise its interest rate from 0.1 per cent.

Bank could act

In a separate speech, Michael Saunders said that the economy was recovering faster than the Bank had anticipated. He said that if the various inflationary factors at work continued, the Bank could end its monetary stimulus programme earlier than expected.

“In this case, options might include curtailing the current asset purchase program – ending it in the next month or two and before the full £150 billion has been purchased,” he said. That move could be accompanied by further monetary policy action next year, he added.

He also believed that the inflation rate could top 3 the forecasted three per cent and may peak at around 4 per cent. “The balance of risks around the central forecast [of the Bank] has changed significantly,” he said.

What does it mean?

But such inflationary pressures are not all bad news for businesses. While the costs of goods may rise from shortages – such as those experienced in the semiconductor industry – inflation can erode the cost of debt.

In addition, some businesses may be able to increase their prices, according to a recent article in Forbes magazine.

“Tie in costs with longer-term contracts if you can do it,” James Cassel, chairman and cofounder of investment banking firm Cassel Salpeter, told the publication. “The effect is the same as early borrowing—locking in pricing that will drop in real terms after inflation.”

Another option was be to increase productivity while investment rates are favourable. But the magazine warned against lowering the quality of goods and services in an effort to cut costs.

 

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