Weakening global demand caused input prices for UK businesses to take another step towards deflation in October, research finds.
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, 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.
The Index tracks factory gate prices, but inflation for consumers is also at historically low levels. Price increases for household goods slowed to 1.2 per cent 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, according to BDO.
Despite this, confidence among UK businesses remains high with the BDO Output Index, which predicts businesses’ growth expectations over the next three months, experiencing a slight drop from 103.3 in September to 103.2 in October, but remaining 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.
BDO partner Peter Hemington says 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.’
He adds, ”Recent announcements on creating a northern powerhouse to rival London indicate that the government is thinking along the right lines, but we could do with more of this sort of thing in the upcoming Autumn Statement.’