Mark Sinclair's Blog: 22 July 2009 - Fear of falling (prices)
22 July 2009
Mark Sinclair is boss of leasing firm Alphabet
Something peculiar is happening. Prices in general are falling at their fastest rate since the Retail Price Index was launched in 1948, it was announced this week, but fleet cost savings remain a major preoccupation for business decision-makers. How come?
It looks as though we are seeing the dark roots of deflation amid the green shoots of potential recovery.
People tend to think of deflation simply as falling prices but technically it means that a smaller supply of money (cash and credit) is chasing after the goods and services available. This leads sellers of some goods that are in plentiful supply to reduce their prices to attract buyers but - and here is the kicker - 'affordability' can fall faster than prices when the money supply contracts very rapidly.
Moreover, not all prices come down, even in a severe deflationary episode. Prices for necessities, such as food and fuel, and for things that remain in high demand, such as (ironically) credit, tend to hold steady or even rise. With businesses and individuals strapped for cash, even mild price rises, which would have seemed trivial in normal (ie inflationary) times, start to feel very painful.
The idea of things becoming more 'expensive' as their prices fall may seem counter-intuitive but that is how a severe credit contraction works.
Deflation isn't officially here - yet. The Consumer Price Index, which excludes mortgage costs and which is the Government's preferred measure of inflation, still stands at 1.8%. It is expected to drop to below 1% over the next few months, despite the half a trillion pounds the Government is throwing at the situation. That is the equivalent of a stack of £20 notes 1500 miles high, by the way.
This shows why even just the threat of deflation is a particular nightmare for Governments. They have to pump money into the economy just as tax revenues from VAT, corporation taxes, fuel duties, stamp duty and other sources go into freefall.
Not surprisingly, they will try to make up for these losses by casting the tax net wider. Hence we will see more moves such as the one - revealed exclusively by BusinessCar last month - to include business mileage in a scheme to monitor and tax firms' overall CO2 emissions.
It is just this kind of prospect that shows why forward-looking fleets are undertaking root and branch reviews of strategy. Getting the right employees doing the right jobs in the right vehicles at the right Whole Life Cost (not the lowest price) has never been so important. It is the fundamental starting point for sustainable fleet strategy and profitable business.
No wonder that the strategic consulting services offered by the leading leasing and fleet management companies have never been busier. There are no margins for error in deflationary times.