Inflation
The recession means that inflation is projected to remain well below the government’s target of 2% for the next two years even once the economy starts to recover. [1] The index this is measured against - the Consumer Price Index (CPI) which excludes mortgage repayments – is below this level in September 2009 at 1.6% [2] and the Retail Price Index (RPI) has been in the negative since January 2009. However, aggregate figures can mask rising prices in specific areas. For example, commodities trading prices have returned to levels last seen at the start of the 2007-08 food crisis, prompting concerns about a fresh rise in food costs and a potential fresh bout of inflation. The price of oil has also risen substantially in recent months, though it is not as high as during the price spike in summer 2008. It is likely that the BOE (Bank of England) and the government will continue to pump money into the economy (quantitative easing) in order to stop inflation falling further and to improve the flow of credit. Rising unemployment and low pay awards will also help keep inflation low.
What are the implications?
- Low inflation will ease pressure on salaries in all sectors as many pay negotiations are based in part on inflation measures. The VCS has experienced pressure in recent years to match salaries in other sectors.
- Low inflation may mean tight organisational budgets created by the recession are slackened and money goes further.
- Beneficiary groups may also find the money in their pockets goes further, particularly relieving pressure on the large numbers in debt.
- Low inflation can stimulate consumer spending as money is cheap and may also provoke a rise in the stagnant housing market.
- People may have more disposable income to spend on charitable giving.
- Low inflation or deflation will put pressure on the BOE to keep interest rates low to stimulate spending and lending.
- However, once the economy starts to pick up, underlying long-term inflationary pressures such as rising food and oil prices may cause inflation to rise, forcing the BOE to raise interest rates and potentially slow the rate of economic recovery.
Moving forward
- How will you approach your next salary review in your organisation in light of low inflation?
- Are you seeing savings in some areas of your budget due to low inflation? In challenging financial times, how should you use this money? Is it possible to boost your reserves if needed, or do you have other pressing demands?
Inflation is closely related to interest rates. If higher interest rates would have an impact (negative or positive) on your organisation, have a look at this driver to help you think through the implications.
Want to know more?
Uk inflation drops below 2% target
Published by: Financial Times, a national broadsheet with no strong political bias
Date: July 2009
Format: Web
What is it? This article discusses the drivers of inflationary change, as measured by the Consumer Price Index.
How useful is this? This article may be of use in exploring the broader economic context.
Other comments: The Financial Times only allows access to ten free articles per month
Published by: Office for National Statistics
Date:Monthly
Format:Web
What is it? An up-to-date monthly summary and chart showing how both measures of inflation (CPI and RPI) have fallen since the past year.
How useful is this? This provides a good overview of the different pressures affecting inflation from a reliable source.
Other comments:
Published by: HM Treasury
Date: Monthly
Format: PDF
What is it? Monthly smmaries compiled by the Treasury which compare and contrast independent forecasts of key economic indicators for the next year to two years, including inflation.
How useful is this? With many contradictory predictions in the press, this brings together a range of respected forecasts and provides a good overall view of where inflation is heading. The summaries contain detailed tables of data forecasts with the averages collated in easy-to-read charts. The forecasts do not provide any new information on Treasury's own views and no significance should be attached to the inclusion or exclusion of any particular forecasting organisation which is subject to review.
Other comments: The August 2009 forecast contains forecasts until 2013.
References
- Forecasts for the UK economy: A comparison of independent forecasts untiil 2013 (HM Treasury, 2009) [back]
- Inflation statistics, Office of National Statistics (ONS) [back]
Discuss
How will this affect your organisation? Have you considered it during your strategic planning? Can you share any interesting relevant links?
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