By Carl Hasty, Director of Smart Currency Business
Inflation is not just a pressure for businesses trading at home — it has a strong influence on the price of imported materials and the profitability of exported goods.
As we have seen in the UK, the concern has been higher than desired inflation, coming at a time when real incomes have been falling. Yet in many other parts of the developed world, including the US, Europe and Japan, the concern has been deflation, which increases the real value of debt over time — a worrying prospect for already heavily indebted nations.
The US Federal Reserve chairman Ben Bernanke earlier this month demonstrated just how crucial inflation is to central banks. Sharemarkets fell and the US dollar had a meteoric rise on speculation that US quantitative easing would soon come to an end.
However, as last week saw, both sharply changed direction after Bernanke said inflation — together with employment — would need to be brought much more into a comfortable range before stimulus measures were wound down, despite a string of upbeat economic data.
The risks posed by inflation being too high or too low are critical for the short and longer-term health of an economy, and so will never be far from the attention of central banks.
For SMEs, this means keeping a close eye on the next UK inflation report, as it will be key to the Bank of England’s policy decisions in the months ahead - and hence play a central role in determining the value of Sterling against other major currencies.
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