Lower than expected inflation supports case to hold interest rates – business industry reaction

21st September 2023

Latest data that showed the annual rate of CPI inflation was 6.7% in August, down slightly from 6.8% in July.

Commenting on the data Kitty Ussher, Chief Economist at the Institute of Directors, said “This slight fall in the headline rate of inflation is better than was expected given the increased cost of petrol in August which had led many to think it would be higher in the short-term before the expected big drop in October.”

“In fact, although there was strong upward pressure from petrol prices, this was offset by falls in many categories of food, as well as in restaurants, hotels and airfares. It is particularly encouraging to see lower core inflation and services inflation, both of which have been stubbornly high in recent months.” 

“Overall this supports our narrative that the interest rate rises we have seen so far are doing their job and should be given more time to work before the Bank of England considers whether the base rate needs to rise further.” 

Martin McTague, National Chair of the Federation of Small Businesses (FSB) said “It’s fair to say small firms will be relieved there wasn’t a rise in inflation, as some had predicted, but this result is far from the substantial fall they were hoping for.”

“The core inflation drop is good news, although the fact that fuel contributed the most on the upward side to inflation is a concern. If pump prices rise further, this will have knock-on effects to almost all sectors.”

“With signs that interest rate rises are starting to bite, tomorrow’s base rate decision by the Bank of England has to be the peak for rates, one way or another. Leaving rates high for longer than needed will devastate the chances of an economic recovery.”

“Small firms are living with the effects of inflation that has been far higher than the target for many months now, so today’s inflation results aren’t enough alone to remove their worries about the economic situation, especially given the fall in GDP announced last week.”

“Around one in ten small businesses say they are at least at moderate risk of insolvency, twice the rate of large companies, and risks abound, from higher debt repayments to lower levels of consumer spending.”

“The Government should commit to measures to help small firms in the Autumn Statement – they are the ones who will put economic growth back on an upward path, if given the right conditions.”

“Decisive action to end late payments once and for all is a necessary step. Allowing large corporates to force their small suppliers to offer them free credit is scandalous and must become unacceptable in the eyes of regulators and the law.”

“We also want to see an overhaul of business rates, and an extension of the current discount for retail, hospitality and leisure businesses beyond next April. Raising the VAT threshold to £100,000 would be another way to unleash the potential of many small businesses, helping to stimulate the economy.”

Suren Thiru, Economics Director at ICAEW said “This surprising drop in inflation suggests that the UK is winning the battle against soaring prices.”

“Inflation’s current downward trajectory should gather momentum over the Autumn as falling energy bills, a weakening economy and the lagged impact of interest rate rises pushes the headline rate noticeably lower.”

“The notable decline in services and core inflation suggests that underlying price pressures are becoming less sticky. The downward pressure from a cooling jobs market and a deteriorating economic outlook should continue to keep them on a downward path.”

“Although interest rates will probably rise on Thursday, additional tightening unnecessarily risks aggravating the financial struggles facing households and businesses, given the long time-lag between rate hikes and their impact on the real economy.”