Business leaders are predicting that a surge in inflation will lead to a rise in interest rates.
West Midlands businesses say the increase in inflation to 4.5 per cent will bring with it further challenges and while overall business conditions remain generally positive, the pace of recovery in the West Midlands has slowed.
The Bank of England expects inflation to remain between four per cent and five per cent this year, well above the Monetary Policy Committee’s two per cent target.
The raft of employment legislation has started and will further contribute to the uphill fight businesses are experiencing in the current economic climate, according to Christine Braddock, president of Birmingham Chamber of Commerce Group.
She said: “The business community is suffering. It is likely that interest rates will begin to move up to one per cent by the end of 2011, two per cent by the end of 2012 and three per cent by the end of 2013.”
Mike Ashton, spokesman for the West Midlands Chambers of Commerce said: “Raising interest rates at a time when fiscal policy is being tightened will heighten the pressures facing businesses even more.”
However, Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said the Bank was still likely to put off a rate hike until November.
He said: “Though the MPC will derive no pleasure from seeing inflation being so high, there is nothing in these figures to suggest that their central forecast - of inflation easing back to target towards the end of next year - will not play out so there is no reason to expect them to move any earlier.”
The consumer prices index (CPI) rate of inflation increased to a higher-than-expected 4.5 per cent in April from four per cent in March, the Office for National Statistics (ONS) said.
In a letter to Chancellor George Osborne, Bank of England governor Mervyn King blamed the spike in inflation on January’s VAT increase to 20 per cent and higher energy and import prices - but said without these factors inflation would have been “substantially lower” and below the Government’s target.
Transport prices rose by 2.8 per cent between March and April, driven by a 29 per cent increase in air travel and a 22.3 per cent surge in sea fares.
Fuel also lifted transport costs as petrol pump prices rose by 1.6 per cent to reach record levels of £1.34 per litre for petrol and £1.41 per litre for diesel.