British Manufacturers Pass The Inflation Buck To Consumers

Amid reports that the manufacturing sector has raised the prices by a record level in February as a result of higher input costs, this has put the fear into the analysts minds that as these increased costs are passed on to consumers, the economy could witness a high level of inflation as well as result in its slowdown.

Many British companies have also started to concentrate more on quality rather than quantity and have realized that it is better to provide better quality and service rather than offer cheap prices. This move has helped them show better results while competing with manufacturers from China and other Asian countries. This was the outcome of a survey conducted by the EEF manufacturers organization and accountants BDO Mr. Stoy Hayward, where 15% or the 200 companies surveyed admitted to cutting down prices in the wake of competition as against in 2004 where 35% had admitted to doing so.

So, more British companies have decided to move on into niche markets, with 53% companies doing so now as compared to 45% in 2004. This move ensures that others cannot follow them because of their lack of expertise. But an increase in the price of raw materials and also other input costs such as fuel and freight has forced manufacturers to pass on the bulk of those additional costs to the consumers.

With inflation rising from 69.7 in January 2008 to 72.2 in February, which incidentally is the highest rise since November 2004, British manufacturers are also caught up in the net of the global credit crunch as export orders shrunk even further due to less demand from the United States, Asia and other parts of Europe.

Analysts say that the increased manufacturing activity in February was only due to manufacturers executing existing orders, and with old backlogs being cleared, the manufacturing levels could fall down again in future. The highest inflation in these rates can be gauged from the rise in the output price index, which zoomed from 57.9 in January 2008 to 59.9 in February.

This will put immense pressure on the Bank of England to hold on to the current interest rates of 5.25% and analysts predict even tougher times ahead if manufacturers cannot absorb any more inflated inputs. However, some analysts are still cautioning that the state of the economy was somewhat better than what was being shouted about and that the manufacturing sector was sure to improve after a few months. A survey done by the Engineering and Manufacturers Organization, the EEF and accountants Grant Thorton, mirrors this optimism. So, a higher number of firms were in fact were expanding employment instead of slashing jobs and this was accompanied by a higher average of balances in order and output, even though they were lower as compared to the last quarter.

The sterling has also become weaker by 8% since the previous autumn and this is helping prop up exports. The chief economist at EEF Mr. Steve Radley said that it was important that the difficulties faced by Britain’s manufacturers on the cost factors are not made much more difficult by the forthcoming Budget. There are also pressures faced by manufacturers in maintaining the salaries and awards given to their employees due to the rise in their input costs and other related expenses.

With the EEF predicting a 0.2% rise in the engineering output and a 0.5% rise in the manufacturing output in the current year, manufacturers in Britain will need to pull up their socks to face the effects of a slowing economy and rising inflation.