In contrast to the stagnant consumer, business spending on inventory accumulation and fixed capital together contributed 2½ percentage points to GDP growth last year. The contribution from stockbuilding cannot be expected to persist and indeed has already waned somewhat. As far as capital spending goes, on the one hand, there seems little rationale for businesses to expand capacity while activity is weak and there is still a margin of spare capacity. On the other hand, business investment is still about 20% lower than its pre-crisis peak (Chart 3). Some of that shortfall reflects replacement investment postponed during the recession, which is likely to be re-instated at some juncture. Moreover, even though overall demand may remain depressed, the rebalancing in activity towards the internationally tradable sectors of the economy will probably necessitate some expansion in capacity in those sectors, while achieving cost savings and efficiency gains also often requires investment. Finally, many large companies are presently cash-rich and can access the capital markets. So a shortage of finance should not prevent them increasing their investment spend, though some smaller businesses relying on bank credit may have more trouble. But, overall, it seems reasonable to expect further recovery in business investment. Given the past substantial depreciation of sterling and the associated improvement in the competitive position of UK suppliers, the performance of net exports has so far been somewhat disappointing. That is less to do with exports, which grew by more than 5% in 2010, reflecting both strong global growth and improved competitiveness.
And, indeed, wage growth has been, and remains, subdued (Chart 9). But other factors have conspired to push inflation well above the MPC’s 2% target. First, the substantial depreciation of sterling, though helpful to the necessary re-balancing of the UK economy, also simultaneously raised import prices. We initially underestimated how strong this impact would be, but we now think that the rise in import prices as a result of depreciation has added somewhere between 4¼% and 6½% to the level of consumer prices. Second, commodity prices – especially oil prices (Chart 10) – have been on something of a roller-coaster, rising sharply on the back of strong growth in the emerging economies up to mid-2008, then falling back sharply as global activity collapsed at the end of 2008. They have subsequently rebounded, reflecting both the recovery, especially in the emerging economies, and temporary adverse supply factors (bad weather affecting agricultural commodities; unrest in the Middle East and North Africa affecting oil). Finally, the increase in the standard rate of VAT has also boosted inflation. The blue swathe in Chart 11 shows our estimate of the combined contribution of these three factors, for a range of plausible assumptions, together with the actual inflation rate (the red line). The green swathe is the implied contribution from all other influences on inflation.