Article:

Business Trends

13 September 2021

Inflation soars as wages rise to help plug labour shortages

  • Employment Index reaches highest level since March 2020, but termination of furlough support threatens future outlook
  • Inflation at second highest level since 2017 following sustained labour shortages

Labour shortages over the course of the summer have driven the BDO Inflation Index to its second highest level in four years. The strong jobs market has also driven the BDO Employment Index to its highest reading since March 2020.

The BDO Inflation Index rose by 0.59 points from 103.01 to July to 103.60 in August, comfortably above the long-term average level of 100, which indicates positive growth. The rise is a side effect of companies adjusting pay levels in order to fill jobs, reflecting residual demand from the wider economic recovery.

Meanwhile, the BDO Employment Index rose by 0.98 points in August, reaching 108.60. Any measure over 95 signals growth in the index. Higher wages have led to increased costs for producers, and are beginning to be passed on to consumers, driving up both consumer and producer inflationWith the recovery ongoing, businesses may feel the need to pass costs on to customers to a greater extent in the near future.

Commenting on the results, Kaley Crossthwaite, Partner at BDO LLP, said: “So far, the economy has proved to be more resilient than anticipated. The speed of the recovery has surprised many, and the furlough scheme has insulated the jobs market from the worst of the pandemic.

“There are dark clouds on the horizon, however. Rising inflation is already being felt by businesses and will soon be felt by consumers, while the withdrawal of the furlough scheme could send shockwaves through a buoyant jobs market.”

Download July 2021 report

The chart below shows a sample of recent data from the Business Trends report. Any scores below 95 represent a contraction or a negative growth rate.

What is Business Trends?

The Business Trends report is one of the key monthly indicators of the performance of the UK economy, and provides an accurate and up-to-date picture of the environment that businesses are facing.

Business Trends covers more than 4,000 respondents from companies employing approximately five million employees across the UK. The report includes separate indices for services and manufacturing sector optimism and output, as well as indicators for UK inflation and employment.

Since 1992, the BDO Business Trends report has provided the most representative monthly measure of business output and optimism available. The results can be used as indicators of turning points in the economy as well as, because of their method of construction, leading indicators of the rates of inflation and growth.

See a sample Business Trends report

How is Business Trends prepared?

Indices are prepared on behalf of BDO LLP by the Centre for Economics and Business Research (CEBR), a leading independent economics consultancy.

Survey's contributing to Business Trends

Four indices covering output, optimism, inflation and employment, are calculated by taking a weighted average of the results of the UK's main business surveys, including:       

  • CBI Industrial Trends Survey
  • CBI Monthly Trends Enquiry
  • Bank of England Agents' summary of business conditions
  • Markit/CIPS Manufacturing and Services PMI data    

Taken together, these surveys cover more than 4,000 different respondents from companies employing approximately five million people in the UK. Collectively, they comprise the most representative measure of economic indicators and business confidence available. The respondents cover a range of different industries and business functions to deliver a comprehensive picture of the general economic outlook.