Britain's ten-year spell of low inflation looks like coming to an end, the Bank of England warned yesterday.
A report by the Bank's rate-setting Monetary Policy Committee to the parliamentary Treasury committee is potentially bad news for business, Birmingham Chamber of Commerce and Industry believes.
According to the MPC, some of the economic factors that have kept UK inflation in check since the the committee was set up in 1997 may now be weakening.
Cheaper imports, globalisation and an increased labour supply created by immigration, have all helped to keep price rises at historically low levels. But the report warns that "the environment is unlikely to be so benign in the future".
It went on: "Many of the benefits of globalisation have already worked through, and the adverse impact on commodity prices of the development of China and India is now being felt."
The downward pressure on costs globally have resulted in period of "great stability" for the British economy. It has given the MPC a "beneficial tailwind" to the MPC in its job of keeping inflation within strict limits set by chancellor Gordon Brown.
The emergence of low-cost producers in countries such as China has led to a rise in the price of UK exports relative to that of its imports, increasing the real purchasing power of employees' wages.
"Such a terms-of-trade improvement allows the economy to grow a little faster for the same inflation rate, or else for inflation to fall without requiring growth to dip," the report said.
This bonus is likely to be only temporary because as workers' wage aspirations rise, costs in the emerging economies will begin to catch up with those in the developed world.
Some aspects of the global economy look unsustainable, particularly the pattern of global current account imbalances and the low level of real interest rates and the high degree of risk-taking, the MPC report said.
"So the macro-economic context is likely to be somewhat less benign," it added.
But the committee believes that the present policy framework has the capacity to "withstand more turbulent times".
James Cooper, policy adviser at Birmingham Chamber, said in response to the report: "No matter what happens over the next ten years there needs to be a balance between controlling inflation and providing competitive interest rates."
Higher rates would dampen consumer spending and reduce the global competitiveness of British manufacturers by strengthening the pound.
"If there is going to be higher inflation and higher interest rates this will be bad news," Mr Cooper said.
On the other hand rising commodity costs could make imports from China and India more expensive, which in turn could lead to a resurgence in home production, he added.
Sterling lost 0.7 cents against the US dollar and fell to a six-week low against the euro following the publication of the Bank of England report.
But analysts cautioned against reading too much into it or the currency market's reaction.
"It seems to be talking about the longer term perspective," said Investec economist David Page. "Viewed in that context perhaps foreign exchange markets reacted a little bit aggressively."
