Weakening global demand caused input prices for UK businesses to take another step towards deflation in October, according to the latest Business Trends report by Bristol-based accountants and business advisers BDO LLP.
The BDO Inflation Index, which predicts businesses’ cost expectations over the next three months, fell for the sixth consecutive month in October to 96.2. This is just above the 95.0 mark that indicates an inflation rate of zero. Based on the current trend, BDO’s Inflation Index will turn negative in February 2015. BDO’s Index tracks factory gate prices, but inflation for consumers is also at historically low levels. Price increases for household goods slowed to 1.2% in the year to September.
Were deflation to set in, its dampening effect on consumer spending, business investment and employment could jeopardise the UK’s economic recovery.
Despite this, confidence among UK businesses remains high. The BDO Output Index, which predicts businesses’ growth expectations over the next three months, experienced a slight drop from 103.3 in September to 103.2 in October but remained well above the 100 mark that represents UK long-term trend growth.
In addition, the BDO Employment Index rose again in October to reach 113.4, up from 112.3 in September. This reflects businesses’ plans to increase hiring over the next three months in response to strong domestic demand and weak wage growth.
Commenting on the findings, Andrea Bishop, audit partner and head of BDO LLP in Bristol, said: “The global economy has slowed and as a result the UK could become caught up in the same deflationary conditions the Eurozone is currently experiencing. Policymakers need to realise that there are far more significant downside risks for growth than there were three months ago. Action is needed now. Interest rate rises certainly should be put on hold, housing market controls have now done their job and the government’s intentions to boost infrastructure spending are most welcome, if not enough.”
