IoD ‘Cost of living eases, but firms still face challenges in raising wages’

Responding to official inflation figures, showing that the Consumer Price Index fell to 2.7% in February, Tej Parikh, Senior Economist at the Institute of Directors, said:

“Businesses and households will be relieved that the peak impact of sterling’s depreciation on inflation now appears to have largely washed through.

“This is certainly a boon for consumers who have been wedged between high food prices on the one hand and subdued earnings on the other for an extended period. But while the strain on the cost of living may ease somewhat, a lot depends on helping businesses – particularly SMEs, who account for 60% of employment – manage high costs and raise efficiency, in order to give workers the ‘double-dividend’ of lower prices and higher wages.

“For the Bank of England, this month’s drop in inflation – combined with tepid business activity and the inclement weather this quarter – furthers the case to hold fire on an interest rate rise later this week. Either way, the Bank will need a few more months’ worth of labour market and productivity data to better judge just how close the economy is to operating at its supply capacity, and therefore risks generating new price pressures.”