Inflation less marked for businesses than consumers

11 May 2011

11 May 2011 | Lindsay Clark

Inflation of business costs is running below that of consumer price increases, new research has found.

A study by FathomFinancial Consulting, on behalf of the LondonChamber of Commerce and Industry (LCCI), found business prices were showing annual inflation of 0.8 per cent for April, much lower then the March consumer price index of 4 per cent, published by the Office for National Statistics.

Compiled from official data sources, the organisation’s Business Prices Index measures total costs associated with raw materials, wages and fixed costs such as rent and bills.

Although businesses were experiencing cost inflation in raw materials and fuel, caused by a boom in commodity prices, low inflation in wages and fixed costs such as capital were off-setting these increases according to Erik Britton, director of Fathom Consulting.

This meant that businesses were unlikely to pass on the full extent of rising commodity costs to other business customers, he said.

“In the context of inflation, real labour costs are falling. Businesses are targeting an average profit margin – on average 7 per cent. What they charge to other businesses will be a mark up over their costs base, and this [BPI] is a measure of their overall cost base,” Britton said.

He explained that fixed costs – the cost of renting equipment for example – had escalated during the credit crunch because of their link to lending rates, but these increases had since fallen back.

Colin Stanbridge, chief executive of the LCCI, said: “The BPI is the only comprehensive measure of the costs facing UK businesses. The latest reading underlines our long‐held view that the [the Bank of England’s Monetary Policy Committee] should keep interest rates on hold for now – businesses are telling us there is no need for higher interest rates yet.”

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