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Is the cost of goods on the rise?

Is the cost of goods on the rise?

 

 

Inflation, as measured by the UK’s consumer prices index, is at 1.5% and is expected to rise above its 2% target for a short period over the coming months. 

What you might find surprising about the above statement from the Bank of England is that if you are trying to make some home improvements, buy camping equipment, book a holiday in the UK or buy a used car… then 2% looks way off.  Prices of many of these items have gone up much more than 2% haven’t they?  Why is that, and are these price increases here to stay?

The short answer is that these price increases are the result of classic supply and demand economics.  Supply of goods has been hit by event after event.  The pandemic has caused a reduction in raw materials and manufacturing output across the globe creating a stock shortage.  Governments have pumped huge amounts of cash into their economies via the various stimulus schemes, propping up key sectors and maintaining, or perhaps even increasing, consumer demand.  Restrictions on personal freedoms have meant that goods related to specific sectors such as home improvement and UK stay-cationing have been in very high demand.  As stock funders who import goods from suppliers all over the world on behalf of our clients, we can also confirm that the Suez Canal blockage did not help the situation!

One of the indicators of inflationary pressure is also the current (or should that be continuing) UK housing boom.  The average UK house price climbed 10.2% in the year to March, the highest annual growth rate since August 2007.   Demand for large houses with gardens coupled with the UK stamp duty holiday policy, and a lack of forced selling due to furlough, has driven this growth.  House price growth means confidence, and confidence means increased consumer spending.

Despite this confidence, the price of most of the items we buy in the supermarket, the fuel we put in our cars and the amount we pay for professional services has not really changed.  It is just a few key sectors where prices have gone through the roof and the reason for this is more down to restrictions in supply than vastly increased demand.  The Bank of England hopes these restrictions will ease relatively quickly.

Something that’s been evident in our business is that clients who have not used our services for some time, perhaps even a couple of years, have come back to re-start their facilities in order to pay their suppliers upfront and in full for the stock they need, as doing so gives them a competitive advantage where the availability of the stock is a concern.   Relying on supplier credit, even when their suppliers offer it, puts them in the same queue as their competitors, whereas paying in full prior to shipment helps to secure the stock they need ahead of the competition.

The Bank of England has said that it thinks this inflationary pressure will be short lived and they will take action to curb it if necessary.  What action this would be is not clear, as putting up interest rates would risk strangling the economy just as it’s getting going again, and cause serious problems for many businesses and highly leveraged homeowners.

In an interview with the Guardian, Sir Dave Ramsden, the Deputy Governor responsible for markets and banking, said the Bank expected price pressures to be temporary but he and his colleagues on the monetary policy committee were aware of the risks.  He said: “There is a risk that demand gets ahead of supply and that will lead to a more generalised pick-up in inflationary pressure. That’s something we are absolutely going to guard against. We are looking carefully at the housing market and a raft of real-term indicators.”

As the UK’s most flexible stock funder, we are currently feeling both the benefits and the pressure of the price increases due to stock shortages.  Our services are in demand like never before, but the cost of international shipping and the challenges in obtaining key lines of stock means we are having to work hard along with our clients to move quickly when stock becomes available.  Truth be told, that’s something we love to do, it is what we are here for, and we are glad to be doing lots of it.

It would be very pleasing if the stock shortage situation improves as we move through the summer, and what remains is sustained consumer confidence and steady growth.  That would be good news for all UK SME’s, us included.  But for now we continue to move at pace to make sure our clients have the stock they need as prices of in-demand goods continue to climb.

 

 

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