Inflating disaster

The credit crunch has everyone worrying, but we have been here before and survived

Peter Austin: Companies must provide alternative sources of credit

Inflation is a sinister beast that, if let loose, devours savings, tramples consumer purchasing power and wreaks havoc on business confidence.

August 1971 saw inflation, as measured by the retail prices index (RPI), fall to 10.3 per cent, but then rise to 26.9 per cent after the first oil shock in 1975. In July this year, inflation was just five per cent.

Today, things are not as bad as they seem. We need to guard against short-term thinking and consider the present situation a sharp rap over the knuckles. The economy and well run businesses may emerge all the stronger.

Interest rates can take up to two years to take effect. When food and fuel prices stabilise, which could happen within 12 months, inflation may drop as quickly as it has risen. And rather than raise interest rates, the Bank of England may lower them to stave off a slowdown, perhaps towards the end of the year. Cutting rates too quickly, easing borrowing for businesses and consumers alike, could stoke inflation in other areas.

Pre-1997, especially during the 1960s and 1970s, the typical course of action for politicians would be to make knee-jerk
decisions that cause long-term damage.

What is more, the IT sector has shown an ability to adapt to economic conditions. Across the sector the use of asset finance is rising, helping to combat reduced credit by easing the decision process for customers.

To soften the impact of the credit crisis, businesses must find ways of maintaining cashflow, supported by access to liquidity at a realistic cost. In fact, the credit crunch has highlighted best practice for IT infrastructure acquisition to the business community.

We must hope that recent price rises in food and oil will stabilise as expected. This will encourage the Bank of England to reduce interest rates, help to increase consumer confidence and ultimately restore sales growth.

However, there remains a serious risk that business investment will suffer if companies do not complement banking with alternative sources of credit.