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UK inflation index hits lowest level since EU referendum

11 October 2019

  • Stronger pound and falling consumer prices drive inflation downwards
  • Manufacturing output falls for a twelfth successive month hitting three-year low

A stronger pound in September and falling input prices have driven the BDO Inflation Index to its lowest level since the EU referendum in June 2016, according to a new report from accountants and business advisors BDO LLP.

BDO’s Inflation Index, which combines input inflation and consumer price inflation data, fell by 1.39 points to 95.36 points in September - the lowest level since the Brexit referendum more than three years ago. It now hovers on the brink of the deflationary threshold (95.0), signalling a potential economic downturn.

A key driver of the fall is the reduction in the rate of consumer price growth as shops seek to win back customers who are tightening their purse strings. At 91.86, the Input Inflation Index fell to a particularly low level in September, with producer prices continuing to decline year-on-year.  

Peter Hemington, Partner at BDO LLP, said: “A lower rate of input inflation brings some relief for manufacturing businesses, but can also ring alarm bells that the economy is heading towards a downturn.

“Unfortunately, these businesses will still have to contend with declining economic confidence which has been badly affected by the latest phase of the UK’s extended withdrawal from the EU. While any kind of Brexit resolution will restore some confidence, this doesn’t necessarily hold true if this resolution is through a no deal.”

Elsewhere in the report, the economic outlook was mixed with an increasing disparity between the manufacturing and services sectors. The BDO Manufacturing Output Index fell for a twelfth successive month, hitting 88.00 in September - the lowest point since October 2016.  However, overall output was propped up by the services sector, which saw the index rise by 1.02 points to 98.63 in September.

The BDO Optimism Index remained flat at 96.26 points, with a small rise in services sector optimism negated by a weakened outlook for the manufacturing sector. However, at 102.16 points, the Manufacturing Optimism Index remains comfortably more resilient than the Services Optimism Index, which now sits at 95.52.

To download BDO’s Business Trends New Economy report and find out more visit www.neweconomy.bdo.co.uk  

ENDS

Overview of the BDO indices:

An overview of all four indices is provided in the table below, detailing figures for the last three months and the same month of the previous year, to allow for comparison. 100 = average value. Above 95 = positive.

  September 2019
(figures for this report)
August 2019 July 2019 September 2019
(equivalent report last year)
BDO Output Index 97.44 96.62 96.99 97.78
BDO Optimism Index 96.26 96.26 99.47 101.47
BDO Inflation Index 95.36 96.75 98.04 101.63
BDO Employment Index 112.81 112.5 112.76 114.72

Note to editors

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world.

Our clients are Britain’s economic engine – ambitious, entrepreneurially-spirited and high-growth businesses that fuel the economy. 

We share our clients’ ambitions and their entrepreneurial mind-set. We have the right combination of global reach, integrity and expertise to help them succeed. 

BDO LLP

BDO LLP operates in 17 locations across the UK, employing nearly 5,000 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network

The BDO global network provides business advisory services in 162 countries, with 80,000 people working out of 1,600 offices worldwide. It has revenues of $9bn

Methodological notes 

The BDO Monthly Business Trends Indices are prepared on behalf of BDO LLP by the Centre for Economics and Business Research ltd., a leading independent economics consultancy. Cebr has particular strengths in all forms of macroeconomic and market forecasting for the UK and European economies and in the use of business survey techniques.

The indices are calculated by taking a weighted average of the results of the UK’s main business surveys. It incorporates the results of the quarterly CBI Industrial Trends Survey (and the CBI Monthly Trends Enquiry which is carried out in the intervening months); the Bank of England Agents’ summary of business conditions; and the Markit/CIPS Manufacturing and Services PMI data

Taken together the surveys cover over 4,000 different respondents from companies employing approximately five million employees. The respondents cover a range of different industries and a range of different business functions. Together they make up the most representative measure of business trends available.

The surveys are weighted together by a three-stage process. First, the results of each individual survey are correlated against the relevant economic cycles for manufacturing and services. This determines the extent of the correlations between each set of survey results and the relevant timing relationships. Then the surveys are weighted together based on their scaling, on the extent of these correlations and the timing of their relationships with the relevant reference cycles.

Finally, the weighted total is scaled into an index with 100 as the mean, the average of the past two cyclical peaks as 110 and the average of the past two cyclical troughs as 90.

The results can not only be used as indicators of turning points in the economy but also, because of their method of construction, be seen as leading indicators of the rates of inflation and growth.

Contacts

Tom Grant
at Headland on behalf of BDO LLP
Mob: +44 (0)78 3322 3170
Tel: +44 (0)20 3805 4841
Email: [email protected]