By Daniel Hunter

Businesses inflation expectations have fallen to the lowest point since April 2010, pointing to reduced cost pressures on the bottom line of UK companies, according to the latest Business Trends report by accountants and business advisers BDO LLP.

BDO’s Inflation Index - which measures inflationary expectations one quarter ahead - dropped from 100.2 in October to 99.2 in November, below the 100.0 mark which indicates average trend growth.

This forecast decline can be partly attributed to a recent stabilisation in oil prices and a reduction in the cost of other commodities such as metals, ores and chemicals. The falling Inflation Index is also supported by official figures, which point to reducing inflationary pressures on UK businesses, particularly on those in the manufacturing and services sectors.

Another cause for a degree of optimism is that BDO’s Output Index, which predicts short-run turnover expectations, increased for the third successive month, rising to 93.4 in November, the strongest reading since July 2012.

However, despite these encouraging signs, the overall forecast for the UK economy remains downcast. The Output Index, although increasing, still remains below the 95.0 mark which indicates growth, while BDO’s Optimism Index, which predicts business performance two quarters ahead, dropped to a lowly 91.4, suggesting that the UK economy will remain weak into both Q1 and Q2 of 2013. Manufacturers’ confidence in their prospects for next year is particularly low, with an Optimism Index score of just 85.9, a decrease of 3.3 from 89.2 in October.

“Inflationary pressures are easing, but the UK economy, especially the manufacturing sector, continues to struggle," Peter Hemington, Partner, BDO LLP, commented.

“Although it was heartening to see Mr. Osborne announcing on Wednesday that capital allowances for small business will be increased ten-fold, this is not enough. The UK’s manufacturing sector continues to struggle, hampered by an overvalued pound and a tax regime that has become uncompetitive against its G20 peer group.

"Together with measures to revive the construction industry, the Chancellor’s New Year’s Resolution must be to stimulate growth in manufacturing, and more widely, by offering further incentives for manufacturing businesses to invest and to drive exports.”

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