Simon Rawlinson on ... inflation

Last week not only saw publication of the latest CPA output forecast – signalling falling output until 2012, but also some unwelcome news from the high street, with the British Retail Consortium reporting its poorest sales figures in 16 years – down 3.5% like for like on March 2010. BRC’s data illustrates the perils of relying on single points of data - March 2010 had been a particularly good trading month because of an early Easter - but the data illustrates the challenges for the economy, barely two weeks into the new austerity programme.

But other than tough trading conditions, what do the construction industry and the retail industry have in common? Latest consumer and factory gate inflation data indicates just how difficult conditions could be for the supply chain in the months ahead. Look behind the surprisingly good CPI data and it has been control of food inflation, running at a relatively low 2.4%, that is helping to restrain further growth in prices.  Looking even further back at factory gate prices – up by 5.4% year on year for UK manufacturers - and it is evident that a significant absorption of costs is taking place within the supply chain.

Construction sector costs have risen by nearly 8% in the year and prices have mostly remained static. However, the increased impact of demand-driven deflation to the high street serves as a painful reminder of the scale of the correction that lies ahead of us. The retail sector is one of the few bright spots in the CPA’s forecast – increasing by 6% in 2011 – and it clearly needs help to keep costs down and tills ringing.

Affordability remains a key challenge in the industry. Construction is the ultimate big ticket purchase and, as in the high street, it harms the industry more than the consumer when purchases are deferred.

Simon Rawlinson is head of insight at EC Harris