BDO report warns of UK deflation

Weaker global demand is edging the UK closer to deflation, according to the accountancy group BDO.

Its Inflation Index, which predicts businesses’ cost expectations over the next three months, fell for the sixth consecutive month in October to 96.2.

This is just above the 95.0 mark, below which indicates an inflation rate of zero. Based on the current trend, the index will decline to negative by February 2015.

BDO’s Index tracks factory gate prices, but inflation for consumers is also at historically low levels. Price increases for household goods slowed to 1.2% in the year to September.

Meanwhile, a Lloyds Bank purchasing managers index report shows business activity in the North West rose in October. However, the latest expansion was the weakest in 17 months.

Similarly, growth of new business and employment slowed during the month. Inflationary pressures from input costs eased, while selling prices were broadly unchanged.

The Lloyds Bank North West Business Activity Index fell from 57.7 in September to a 17-month low of 55.7 in October, broadly in line with the UK trend.

BDO partner Tim Entwistle said:

“The global economy has slowed and as a result we could become caught up in the same deflationary conditions the Eurozone is currently experiencing. Policymakers need to realise that there are far more significant downside risks for growth than there were three months ago.”

“Housing market controls look to have done their job, but interest rate rises should certainly be put on hold. The government’s intentions to boost infrastructure spending are also welcome but more could be done. The ongoing debate about creating a northern powerhouse to rival London indicates that the Government is thinking along the right lines, but we could do with more of this sort of thing in the upcoming Autumn Statement.”

In spite of deflation threats, businesses remain confident in their growth expectations for the coming three months. The BDO Output Index remained well above the 100 mark that represents long-term trend growth at 103.2 in October.

Source: The Business Desk
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Words: Daniel Pearce

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