Managing Your Cash Flow

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Don’t panic about deflation

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The RPI is based on a basket of goods (excluding mortgage repayments) that represent spending patterns. It isn’t, however, the index that is used to measure official inflation; that’s the Consumer Price Index.

Straight founded his recycling company in 1993. The company listed on the Alternative Investment Market in 2003 and now turns over £25m.

He says: “I don’t think we’re looking at deflation. We’re looking at a fall in the rate of inflation and it’s still higher than the government would like it to be. Hopefully we won’t get to deflation because it’s very dangerous.

“It basically wrecks the whole economy. Deflation means that even though interest rates are very low, the cost of borrowing becomes higher than it apparently is because money is worth less over time and it’s very difficult to correct. It can take many years to recover from a deflationary situation. We are quite anxious it doesn’t happen.”

Straight believes the weakness of the pound could be the UK’s saving grace. “We obviously import a lot of things like food and the fact that we do that will keep a bit of inflation in the system,” he says.

Falling interest rates have contributed to low inflation. The base rate now stands at 1 per cent and there’s speculation it could fall further. Straight says that will make little difference to his business. He says: “We used to get a lot of interest on cash on deposit. Two years ago, five per cent of our earnings were from interest. This isn’t the case any more. In order to stand still, we’ve got to make up that 5 per cent from somewhere else, like profit on sales.”

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