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Inflation forecasts are all too easily overlooked, but you ignore them at your peril, warns Rupert Saunders
The latest Bank of England inflation forecast was published on the same day as the Queen's speech, the England-Holland football friendly and shortly after more than 150 academics were abducted in Baghdad. So, in the overall scheme of major world events, it is hardly surprising that it was barely reported.
However, for those of us who follow these things, this quarterly forecast report is the best indicator of how the Bank (and therefore its Monetary Policy Committee) is thinking. In turn, that determines future interest rate policy and the economic climate in which we all operate - both as businesses and individuals.
There is a danger in assuming none of this economic mumbo-jumbo affects the rather more mundane daily task of running a business car fleet. Nothing could be further from the truth. Even ignoring the wider world in which interest rates affect the health of every business, there are plenty of direct relationships between inflation, interest rates and business car management.
For a start, interest rates certainly affect how much you pay for your cars - whether you have contract hire, bank loan or buy them outright (you should take into account the interest you could have earned if you had hung onto the money). Stable interest rates are essential for any budget planning.
At the other end of the equation, costs such as fuel, service and maintenance charges all contribute to inflation. If they are rising then inflation may rise and interest rates may go up - so business car managers get hit with a double whammy of rising fuel prices and rising lending costs.
In fact, the slow down in fuel price rises (crude oil prices are falling currently) is one of the reasons why the Bank's inflation forecast was more optimistic than many observers had expected. It predicts inflation will rise rapidly to 2.7% in the new year but then fall back towards its target of 2% by late summer 2007.
“There is a danger in assuming none of this mumbo-jumbo affects |
Rupert Saunders |
The forecast is based on interest rates remaining steady at 5% for the foreseeable future. Indeed, some economists are now predicting interest rates at, or slightly above, 5% for the next two years.
While stability may be a good thing, it is worth remembering that rates in 2004 were below 4%. To bring that closer to home, it means the cost of borrowing to fund your car fleet will have gone up by 25% over the typical three-year replacement cycle.
As a professional manager, you should be reacting to that increased cost. Have you reviewed your fleet funding methods recently? Have you looked at the model mix on your fleet? Have you thought about increasing (or decreasing) your replacement cycle?
Business car managers need to be proactive. Running a car (or van) fleet is a major cost on any business and you do not operate in an commercial vacuum - which is why dry economic documents such as the Bank of England inflation forecast continue to be (almost) as important as the football score.
Rupert Saunders is a specialist in automotive finance and retail
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