The price of low inflation - Financial indicator
January 2009
In the late spring, inflation pressures became a real concern in the UK,
with raw material costs rising by 30 per cent, factory gate prices up by 10 per cent and disposable incomes squeezed in particular by higher food and fuel costs.
In fact, the Retail Price Index peaked in October at 5.2 per cent and since then has eased back, a process which is expected to continue. Our forecasts are that, by the fourth quarter of next year the rate of inflation on this basis will be negative as much lower fuel and housing costs feed into the comparison.
On the surface this is good news and promises a welcome respite for charities, however it is not the whole story. Reduced price pressures are a reflection of the economic downturn and the lower pace of price increases will be offset by lower income flows to the sector as much lower interest rates feed through to returns on cash, dividends are cut and legacy values are reduced by lower property and equity values. In addition other costs will continue to rise, in particular as central Government reduces support to local authorities. Imports will also be a problem, over the year to end November sterling has fallen by over 25 per cent against the US dollar, 14 per cent against the euro and 36 per cent relative to the yen.
Author: John Kelly
John Kelly is head of client investment at CCLA.
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