How worried should franchises be that UK inflation has fallen to zero?
For the past three decades, defeating inflation and achieving price stability have driven UK economic policy. Now, for the first time since records began in 1960, UK inflation has fallen to zero, down from 0.3% in January. It will, in all likelihood, fall again this month, resulting in deflation. From 2008 to 2012, inflation was allowed to run significantly above the Bank of England’s (BOE) 2% inflation target, without an aggressive interest rate response. The current flat rate comes as falling oil prices put the skids on prices.
Business groups overall seem to be welcoming the news but uncertainty about future inflation could cause companies to delay investment. Low inflation makes the repayment of outstanding debt more difficult and could even be the result of something more sinister. There are signs, however, that the current situation won’t last.
This fall in inflation hands the chancellor George Osborne a pre-election boost as people go to the polls with more money to spend. He took to Twitter to write: “Inflation at zero is a first for the British economy. Low inflation due to falling oil prices is good news for family budgets.”
British holidaymakers heading abroad this summer may not be so pleased as Sterling was down 0.4% against the Euro, but just how worried should British franchises be by the news?
Depressed wages could hamper productivity," Cyrus Afkhami, founder, My Tutor Club
It seems increasingly likely that inflation will remain significantly lower than 2% for the foreseeable future. With the recent announcement earlier this week that the official inflation figure is a paltry 0%, there are some implications for business of falling prices. The short-term consequence is that people feel richer; in short, their spending power increases and every pound goes further. On the face of it, this bodes well for businesses as consumers, buoyed with this extra confidence, make purchases that otherwise they may not have made previously. However, if inflation remains at 0% or turn to deflation, the medium-to-long-term impact on businesses, and indeed the wider economy, would become damaging – we would experience stagflation.
The risk with deflation is that if consumers expect prices to continue falling then over time they are more likely to defer purchases in an effort to secure even lower prices in the future. This deferment can depress economic activity and have negative knock-on effects throughout the rest of the economy, just as Japan has experienced since the 1990s.
The spectre of deflation may also provide an opportunity for business to freeze wages; this may reduce costs in the short term but depressed wage growth can reduce incentives amongst employees and hamper productivity. It does seem that we are some way off the negative effects of deflation – Eurozone countries are slightly more concerned – but nevertheless even the mere possibility of falling prices can dampen investor sentiment and confidence.
"Zero inflation is great for franchises," Ivan McKeever, CEO, SwitchMyBusiness.com
The news UK inflation has fallen to zero is great for franchises and anybody who has ever considered joining the small business franchise ownership sector. Franchises are already a lower-risk solution and now the risk has been lowered further. This should lead to a rise in franchised businesses across the UK, giving a healthy boost to anyone who wants to take advantage of the benefits of a ready-made business. As anybody who has ever looked into starting a franchised business will know, while there are benefits, some of the biggest financial outlay comes in the early stages and this is where some can fall before they even begin.
Crucially, you will incur costs even before signing the franchise agreement with a brand, from professional fees including an accountant, to costs for equipment, insurance, employee training, business licences, rent, signage, advertising, to name just a few. With zero inflation bringing more steady and predictable costs, a franchise will be a very real possibility for the first time for many, whether setting up their first business or adding to an existing portfolio. For those setting up, the amount they will need to invest in that franchise will now be lower, which will lead to growing confidence in the sector.
The knock-on effect will be that everything from supplies and salaries to uniforms and expansion will be cheaper. A rise in franchised businesses and an increased confidence in their take-up is a win-win situation for the UK economy as a whole.