Despite four recent interest rate rises, the latest BDO Business Trends report reveals a grim outlook for inflation, with the BDO Inflation Index at its second highest in over two years.
The Inflation Index shot up to 109.3 in June from 106.0 in May; one of the highest figures recorded since the inception of the index in 1999. This implies that firms expect rapid price growth in the third quarter of 2007, at an annualised rate of 2.9 per cent and makes unsettling reading for the Monetary Policy Committee.
Bank of England to re-assert authority
At a time when the Bank needs to reassert its credibility in tackling inflation head-on, the report presents solid evidence that it needs to act now and raise rates in July, with a further rise looking likely in November, in order to bring inflation back under control.
Businesses can absorb a rise
A slight increase in the BDO Optimism Index (which indicates business confidence over the medium term) from 101.4 in May to 101.5 in June confirms a buoyant mood from businesses, indicating that a rate rise in July could be absorbed. This view is supported by the Output Index which has also seen an increase this month from 101.2 in May to 101.8. Significantly this month, the manufacturing sector has crept up to above the 100 mark, suggesting that businesses are, in the short term at least, confident they can pass on high input costs.
Neil Craig, managing partner at BDO Stoy Hayward in Scotland said: ‘The BDO Inflation Index has been consistently high since the end of 2006 and indeed has shot up this month.
Contact: Laura McGinness
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