A stronger pound in September and falling input prices have driven the BDO Inflation Index to its lowest level since the EU referendum in June 2016, according to our latest Business Trends report.

BDO’s Inflation Index, which combines input inflation and consumer price inflation data, fell by 1.39 points to 95.36 points in September – the lowest level since the Brexit referendum more than three years ago. It now hovers on the brink of the deflationary threshold (95.0), signalling a potential economic downturn.

Falling consumer price growth

A key driver of the fall is the reduction in the rate of consumer price growth as shops seek to win back customers who are tightening their purse strings. At 91.86, the Input Inflation Index fell to a particularly low level in September, with producer prices continuing to decline year-on-year.

A lower rate of input inflation brings some relief for manufacturing businesses, but can also ring alarm bells that the economy is heading towards a downturn.

Unfortunately, these businesses will still have to contend with declining economic confidence which has been badly affected by the latest phase of the UK’s extended withdrawal from the EU. While any kind of Brexit resolution will restore some confidence, this doesn’t necessarily hold true if this resolution is through a no deal.

Manufacturing output declines for a twelfth successive month

Elsewhere in this month’s report, the economic outlook was mixed with an increasing disparity between the manufacturing and services sectors. The BDO Manufacturing Output Index fell for a twelfth successive month, hitting 88.00 in September – the lowest point since October 2016. However, overall output was propped up by the services sector, which saw the index rise by 1.02 points to 98.63 in September.

Business optimism is flat

The BDO Optimism Index remained flat at 96.26 points, with a small rise in services sector optimism negated by a weakened outlook for the manufacturing sector. However, at 102.16 points, the Manufacturing Optimism Index remains comfortably more resilient than the Services Optimism Index, which now sits at 95.52.

Download BDO’s Business Trends New Economy report and find out more about BDO’s five New Economy policies.

Peter Hemington, National Head of M&A at BDO.

“A lower rate of input inflation brings some relief for manufacturing businesses, but can also ring alarm bells that the economy is heading towards a downturn. Unfortunately, these businesses will still have to contend with declining economic confidence which has been badly affected by the latest phase of the UK’s extended withdrawal from the EU.”

Peter Hemington, National Head of M&A at BDO.

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