Production challenges and inflation lead to 'stagflation' fears with consumers to pay the price

Thu 25 Nov 2021
Posted by: William Barns-Graham
Trade News

British manufacturers are struggling to meet record demand as severe supply constraints put a brake on production.

UK manufacturing order books improved in November to their strongest levels since records began in 1977, while export order books are at their strongest since March 2019.

However, according to the latest monthly CBI Industrial Trends Survey, only 9% of firms were happy with their stock levels, with stock adequacy for finished goods at its weakest on record.

Of responding firms, 69% said they were likely to raise prices in the next three months.

Costs passed on

Anna Leach, CBI deputy chief economist, said that intense supply side challenges were putting pressure on firms’ capacity to meet demand.

“Alongside record order books, stock adequacy was the weakest on record in November and manufacturers are increasingly having to pass on significant cost increases to customers,” she said.

Inflationary pressure

According to the Guardian the CBI report is the latest to provide evidence of inflationary pressure and will fuel speculation that the Bank of England will raise interest rates from the record low of 0.1% on 16 December.

Samuel Tombs, chief UK analyst at Pantheon Macro, said the CBI’s report indicated an 8% annual increase in the cost of goods leaving factory gates by January, which would mean consumer price inflation rising above 5% in the spring.

Stagflation

Productivity challenges and rising inflation have raised fears of ‘stagflation’ – which is when a period of slow economic growth and high unemployment coincides with a rise in inflation.

The effects of stagflation are considered to be worse than a recession because it combines high prices with fewer jobs and lower wages.

Dealing with one problem can make the other worse, reports City Index.

Price hikes

Trade Finance Global reports that US and UK companies are struggling with inflation, and many are already passing on price hikes to consumers.

In the UK, a survey of 1,000 businesses by the British Chambers of Commerce (BCC) reported that 80% saw an increase in their prices this year. Only 2% of manufacturers had not faced increased costs or shortages.

Skills in demand

Half (50%) of businesses reported that they, or others within their supply chains, had experienced skills shortages in the past 12 months. 

Shevaun Haviland, director general of the BCC, said: “Unless action is taken soon, firms could be forced to cut back on their capacity or limit the range of products they offer.”

Falling confidence

The most recent IoD Directors’ Economic Confidence Index fell slightly from -1 in September 2021, to -6 in October 2021. 

Kitty Ussher, chief economist at the Institute of Directors, said directors were nervous about the state of the economy.

“Nearly nine in ten business leaders expect inflation to be higher than the Bank of England's target in 2022 and wage pressures are also being felt acutely,” she said.