Stagflation strikes again

Inflation has broken through three per cent, reducing the chance of rate cuts and threatening growth. Brian Farthing, senior economist at PricewaterhouseCoopers, considers the impacts of rising prices on growing businesses.

Companies face rapid rises in input prices, whether that’s raw materials, petrol, or even food. The decline of the pound against the euro has increased the pressure.

There are two ways to deal with this situation: by squeezing your own margins, or trying to pass price rises on to consumers. Until now, companies have generally done the former, but that can’t go on forever and now they are passing on price rises.

That begs the question: will consumers take on bigger price rises, especially when they may be worried about rising non-discretionary expenditure themselves? Items like rent, food and debt repayments have all been increasing fast, and added to that there may be a squeeze on household incomes following slow employment growth.

Rising inflation creates a lot of losers, but there are also some winners. If you can be more efficient than your competitors, or if you have built up a larger war chest during the good years, you may now be in a position to win business from your competitors as they are forced to put up prices.

Our outlook is for CPI [Consumer Price Index] inflation to remain very close to three per cent in the next few months. But we expect it to head back to the “comfort zone” of nearer two per cent later in the year. Rising inflation has been caused in part by rising commodity prices, and we don’t expect those to continue escalating at the current rate for long.