Inflation matters to us all – we’re about to be reminded why

So what is inflation?

Inflation is used to describe the rate at which prices of goods and services increase (or decrease) over time, expressed as a percentage of prices that applied twelve months earlier. As it is impossible to examine the price of everything bought and sold, economists at the Office for National Statistics (ONS) create an index composed of more than 100,000 items of the most commonly purchased goods and services. These are then weighted according to the proportion of our money we spend on each – fuel and food, for example, will have a higher weighting than cinema tickets or postage stamps. The price of everything is updated and reported every month.

The index used most commonly to report inflation in the UK is the Consumer Prices Index (CPI).This index excludes housing costs such as changes in the cost of renting property. Given that such costs represent a considerable percentage of our total expenditure, it should come as no surprise to learn that from March next year, the ONS proposes to introduce a new index which will include such costs. If this index is later adopted by the Bank of England, there will be a change in the basis on which benefits and pension payments are calculated and Government economic policy set. By way of example, if housing costs were included within the main index, the latest inflation figure (October) would have been 1.2% as opposed to the 0.9% referred to above.

Why are we likely to hear more about inflation next year?

The short answer is because we expect prices to rise faster next year than they have for several years,

Why might the rate of inflation be increasing?

There are two main reasons economists expect inflation to rise over the next few months:

• The price of oil has increased recently (in real and dollar terms) and oil is one of the most heavily weighted elements within the basket of goods assessed for inflation. It is also an important contributor to the cost of many other products and services.
• The UK currency has depreciated sharply against all other currencies over recent months. This has the effect of making any goods we import more expensive. Import costs account for about a third of the CPI basket, so unless the pound recovers in value fairly quickly, this important driver of inflation will continue to feed through in higher prices.

Why does all this matter?

Inflation matters because unless wages increase at the same rate as prices our spending power will be reduced. Growth in the UK is almost totally dependent on consumer spending. Any loss of spending power could be quickly translated into slower growth, with all the political and economic implications that might follow.

Andy Milson, Head of Partner Training & Development at BNP Paribas Leasing Solutions

Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.

If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.