Inflation Falls Again

Inflation has fallen again, with the Office For National Statistics revealing that the Consumer Price Index (CPI) measure dipped from 1.6 per cent to 1.5 per cent in August.

The news, which will have a range of implications for SMEs, was brought about by a number of movements in various prices relative to the 12 months to July.  

Falls in the cost of motor fuel, food and non-alcoholic drinks had the greatest downward impact on prices. These were partly offset by rises in the cost of clothing, transport and alcohol.

The Retail Prices Index, which includes the cost of housing, also fell in August, from 2.5 per cent to 2.4 per cent.

A lower cost of living may be good news for SMEs in the retail sector, as it restricts the fall in real-term incomes for those whose pay has not risen in line with inflation.

All this means consumers will have more to spend in shops than they would had CPI been higher. However, the overall spending power of households has continued to drop, according to pensions firm MGM Advantage.

It has calculated that UK households would need an extra £10.1 billion a year to maintain the standard of living they had a year ago, which works out at £381 each.

MGM Advantage spokesperson Aston Goodey said: "'Inflation continues to have an impact on the family finances with many people having cut back on everyday essentials to balance the household budget.

"Until we see some real wage growth, people will continue to feel the pinch of the cost of living."

Another implication of low inflation for SMEs is that they may not yet come under as much pressure to raise wages for their staff as might otherwise be the case.

Pay rates are set to start rising faster than inflation from the middle of next year, Bank of England governor Mark Carney predicted last week in an address to the Trades Union Congress.

Expert Opinion

The fall in inflation is likely to be welcomed by many businesses, with the drop essentially increasing spending power for consumers but also having an impact on the need to increase interest rates across the short and medium term.

"The latter is of particularly interest to the SME community as it of course may have a bearing on future borrowing and also the potential for investment in the coming months.

"It will be interesting to see how this develops in the future and we would urge SMEs to not only keep tabs on the issue but ensure they have the support network in place to help them along every step of their future journey."

Fergal Dowling, Partner