Here is the dilemma. Yet more evidence emerged yesterday to suggest inflationary pressures are bubbling. In fact, manufacturers’ input prices rose by 20.6 per cent in the year to March; that’s the largest annual rate of increase since records began in 1986. Output prices rose by 6.2 per cent in the year to March; the last time this index rose so fast was in May 1991.
So inflation is building. Manufacturers are passing their higher costs on to retailers, it is only a matter of time before retailers up their prices – or so you would have thought.
Yet this is what Sir Phillip Green, the owner of BHS, Topshop and Dorothy Perkins said last week. “The market is probably as difficult as I’ve ever seen it. There’s no way we can pass anything on…you have to absorb everything.”
So, on the one hand, it’s time to hit the inflation panic button. Prices are clearly going to rise, the Bank of England had better up the rate of interest tout suite. But on the other hand, conditions are so taut on the High Street that retailers will have to absorb these extra costs, and in fact what is really needed is a cut in the rate of interest.
Sir Phillip’s pessimism was supported yesterday by the latest set of data from the British Retail Consortium and KPMG. Like for like retail sales fell by 1.6 per cent in March compared to the same month in 2007. That’s the first annual fall reported by the BRC in two years.
Helen Dickinson, Head of Retail, KPMG, said “Given the timing of Easter, one thing we expected was this month’s figures to be strong. Instead, we have the worst monthly performance since July 2005. Retailers were hit by the double whammy of an early Easter and poor weather even before factoring in the slowdown in consumer spending on the back of rising inflation, falling house prices and the impact on consumer confidence of the credit crisis.”
Yet, says Stephen Robertson, Director General of the BRC, “Retailers are fighting back by keeping prices low and delivering extra value.”
It would be harder to find a better example of the two conflicting forces at work right now.
In fact, here is another example of contradiction. The price of oil, at the time we took our daily reading from the New York Mercantile Exchange, was at a new all-time high.
But does the price of oil mean interest rates should rise or fall?
If it rises, then we are all worse off. We have less money to spend elsewhere, so actually, rising oil could be deflationary. It all depends on whether more-expensive oil leads to higher wages, like it did in the 1970s, or whether we just have to grin and bear it, and absorb the higher cost.
Some economists dismiss the effect of rising oil as a one-off. That’s all very well, but it is tempting to conclude that oil seems set on a course for steady rises in price – the jury is out, but it is dangerous to assume that oil will fall back in price any time soon. But even if the combination of rising demand from China and India, and no obvious source of extra supply, means oil will continue to rise in price for the foreseeable future, for the reason given above, that does not necessarily mean this is inflationary.
So with the economy in a right royal mess, with retailers apparently absorbing manufacturers’ rising costs, maybe the Bank of England can get away with further rate cuts, despite rising prices?
Sure, inflation may lift by more than a full percentage point above target soon, but it does seem reasonable to assume it will fall quite rapidly.
So that is the case for cutting rates when prices are going up.
But there is an important implication for this argument. If we can ignore pricing pressures because they are external and not related to the level of demand in the UK, why did falling prices, where their cause also was external, lead to falling interest rates earlier this decade?
There is a total lack of balance in the arguments being put forward. Sure, a case could be made for letting interest rates fall now, but equally the same logic says rates were allowed to fall far, far too low earlier this decade.
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