BUSINESS PRICE INDEX
June 2009
COSTS OF CAPITAL INCREASING
The London Chamber Business Price Index (BPI), provided by
Fathom Financial Consulting, shows that businesses across the
UK and in London are feeling the pinch between falling demand
and increasing costs – particularly costs of capital. Annual
inflation in the London Chamber BPI stood at 5.1% (UK) and
5.1% (London) in the first quarter of 2009, substantially higher
than CPI inflation (3.0% in the same period). Consumers can
spend less when times are hard, buying fewer baskets of goods
and services. But businesses cannot walk away from their fixed
costs – buildings, plant and machinery – so easily. And inflation
in those costs is increasing, while consumer price inflation is
easing.
Commenting on the latest results from the London Chamber
Business Price Index (BPI), Colin Stanbridge, Chief Executive of
the London Chamber of Commerce and Industry (LCCI) said:
“Business inflation has fallen over the last quarter but it still
remains well above CPI inflation. Amidst tough economic
conditions, consumers are cutting back, but businesses are
unable to follow suit because their unavoidable fixed costs have
risen not least because the cost of borrowing has risen. Although
business costs are not growing as fast as they were three months
ago, firms will still need to make savings to counter the fall in
demand for their goods and a slowing of production.”
BPI
United Kingdom
BPI
London
5.1 %
5.1 %
Provided by Fathom Financial
Consulting
What is the BPI?
The London Chamber BPI is a new
measure, compiled from official data
sources, of the total costs
associated with producing a typical
basket of goods and services.
It is designed to provide policy
makers, businesses and the media
with a regular, comprehensive and
rigorous assessment of business
costs – to do the same job for
businesses that the CPI does for
consumers.
The London Chamber BPI weights
together measures of input costs of
raw materials and energy,
intermediate goods and services,
and labour costs (which together
comprise total variable costs) and
capital (or fixed) costs, where the
weights are derived from the most
recent input/output tables for the
UK.
Previous Results (Quarter 4 2008)
6.2%
5.9%
LONDON CHAMBER OF COMMERCE – THE VOICE OF LONDON BUSINESS
WHAT IS DRIVING BPI?
Falling oil prices and falling wage costs in financial
services mean that annual BPI inflation slowed in 2009
Q1. But it remains over 2% points higher than annual
CPI inflation in the same period. The gap reflects
higher inflation in the cost of capital for businesses, as
the credit crunch bites harder. The BPI measures the
costs associated with producing the typical basket of
goods and services. And, while the cost of capital is
rising, demand for goods and services is falling, thanks
to the recession. Unlike variable costs, the costs of
capital are fixed costs that cannot be avoided when
demand falls: buildings, plant and machinery are
expensive even when factories stand idle.
Annual inflation in fixed costs rose to 10.3% in Q1,
reflecting both higher lending rates to businesses and
falling output from those businesses. Annual inflation in
variable costs (labour, fuel and raw materials, and
bought-in goods and services) fell to 2.2% (UK) and
2.0% (London), reflecting lower oil prices and wage
costs, especially in financial services, where Q1
bonuses were far smaller than usual. It is interesting
that the costs of electricity, gas and water continued to
grow in Q1 in spite of lower global commodity prices:
we expect these cost pressures to ease in coming
quarters, particularly if sterling continues to strengthen
against the dollar.
UK BPI and contributions
Annual percentage changes
8
6
BPI
4
Variable costs
2
0
Fixed costs
-2
-4
01
02
03
04
05
06
07
09
BPI and CPI
7
Annual percentage changes
6
BPI
5
4
3
2
CPI
1
The London Chamber BPI, provided by Fathom
Financial Consulting, will be updated on a quarterly
basis. The next update in August will include a
preliminary estimate of BPI inflation for the second
quarter of 2009.
08
0
-1
-2
-3
01
02
03
04
05
06
07
08
09
For questions on the motivation for this research and how it might be used, contact Helen Hill at the London
Chamber of Commerce and Industry. For technical questions on the construction of the London Chamber BPI,
contact Erik Britton at Fathom Financial Consulting.
Helen Hill; Director of Policy & Public Affairs; hhill@londonchamber.co.uk; T 020 7203 1882; M 07500 013 166
Erik Britton; Director; Fathom Financial Consulting; erik.britton@fathom-consulting.com; T 020 7796 9669; M
07854 788 462
London Chamber of Commerce and Industry is the capital’s largest and most representative business
organisation, comprising some 3,000 members which together employ 500,000 people. Our members range in size
from multi-nationals such as BT and Thames Water to SMEs and sole traders. www.londonchamber.co.uk
Fathom Financial Consulting is a new kind of consultancy. Independent and rigorous, Fathom brings cuttingedge economic and econometric methods to bear on the problems confronting governments and businesses
across the industrial spectrum. www.fathom-consulting.com
LONDON CHAMBER OF COMMERCE – THE VOICE OF LONDON BUSINESS