In the past week we have seen indications of hard times in the coming months.
Figures released show annual inflation at 3.7%. This has been caused by a combination of factors, many of which are expected to stay with us in the foreseeable future – increasing costs of fuel and energy, commodities and raw materials (including many metals). Natural disasters have hit the harvests of many basic foodstuffs, reducing supply and pushing up prices. And we can expect to pay more for our clothes driven by the increased cost of cotton and the fact that workers in the Third World deserve and are starting to demand higher wages.
Perhaps a less obvious factor is that since the start of the financial crisis in 2008 Sterling has lost some 30% in value against the US dollar and 17% against the Euro. In simple terms we are having to pay more for imports – adding to inflation. This is not just higher prices for imports for consumers but also increased costs to businesses which import raw materials or components as part of their production process.
On a positive note, exporters who price their goods in sterling will benefit as their goods become cheaper in overseas markets. Unfortunately, many of the countries which are the UK’s main customers are in Europe and their own economies are “feeling the pinch”.
Add to the above the fact that we have yet to see what impact the fuel and VAT increases will have just adds to the gloom. Some estimates suggest that inflation may peak at 4% or even 5% this year. At this stage there is little indication that wages are following suit with many employees may face an unofficial pay freeze. The end result, in the short term at least, is likely to be a “tightening of belts” by consumers as real spending power shrinks.
As far as consumers are concerned, inflation hits hardest those on fixed incomes, such as pensioners. However, with unemployment rising and the prospects of more job losses following public spending cuts wages are unlikely to keep pace with inflation, so the real spending power of our cash will diminish.
Businesses will not escape either. The increasing cost of raw materials and components can cause cash flow problems and if the business is in a price-sensitive market it may be difficult to pass on some or all of the cost increases.