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Confidence, not rising inflation, is the concern for businesses

16 Aug 2016

Traders in front of a digital wall displaying market dataCommenting on today’s official inflation figures, which saw the headline Consumer Prices Index rising to 0.6% in July, James Sproule, Chief Economist at the Institute of Directors, said:

“This small rise in the headline inflation rate is in line with expectations, with the Office for National Statistics suggesting that the fall in the value of the pound, which started at the beginning of the year but accelerated after the EU referendum, could feed into higher prices for consumers. The prices UK manufacturers pay for imports is rising quite sharply, although part of this is due to the rally in oil prices in the last few months.

“The Bank of England is focussed on reducing the impact of the Brexit vote, and is paying little attention to inflation for the moment. It seems likely the Bank would be relaxed about CPI rising above its 2% target, although at some point it will have to start thinking about the long-term inflation risk of ultra-loose monetary policy. For businesses, the key question at the moment is not the cost of funding (interest rates) but confidence. Thus while the Bank is using the tools it has to boost markets, in the real economy the more important factor is what the Government does at the Autumn Statement.

“There is an emerging business optimism gap, with companies feeling more hopeful for their own performance than they do for the wider economy. To prevent these fears turning into actual cuts to investment and hiring, the Chancellor needs to take steps like increasing the Annual Investment Allowance and simplifying the tax system for small and medium-sized companies.”  

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