This Is Guernsey

By Tom Edwards

INFLATION may be largely out of our control but there is no need to panic, business experts have advised. It emerged last week that inflation had hit a record 17-year high of 5.5% for the end of June, up 0.7% from March.

The figure for June last year was 4.7% and just 3.4% for June 2006. Guernsey’s inflation figure is largely determined by wider economic influences, business community leaders said.

‘There is clearly a concerning trend of rising inflation since the last quarter of 2007, but a significant amount of this is due to housing, fuel and food costs – factors that are outside the States’ control,’ said Guernsey Chamber of Commerce president Paul Luxon (pictured).

‘Guernsey is a small island with limited land and we import virtually everything we consume. It’s a global situation and our economy has to cope with it, just as the UK does.’

Wage negotiations were not the way to go, said Mr Luxon. ‘Whilst the majority of factors affecting inflation are external, we must try to be stringent with the things that can influence it, such as wage settlements.

‘Now might be a time when many people are tempted to resettle salaries, but we must try to tighten our belts instead.’

Chamber is pleased that the States of Guernsey has a low inflation target, he added.

‘There is no need to be overly concerned, but we do need to be cautious.

‘Unfortunately, there is no magic solution.’

The lending market was getting tighter and people were feeling the bite, said Cherry Godfrey MD David Cherry.

‘We’re not seeing the same deals around as six months ago, but I don’t think it’s been a major hike.

‘Some financial institutions are becoming more picky in terms of customer suitability, but local firms such as ours are open for business because we know the market in Guernsey.

‘The number of those unable to repay loans tends to be lower than in the UK and so we haven’t reacted as severely as some UK firms.’

The reality is that there is very little that we can do about inflation in Guernsey, said Dawnay Day Milroy director Paul Meader.

‘Most governments have three policy levers to use in governing the economy – interest rates, the exchange rate and fiscal policy.

‘In Guernsey the first is fixed by someone else who is not concerned about the specifics of our economy (Bank of England setting interest rates) and the second is fixed: 1:1 to sterling.

‘That leaves just fiscal policy and so allows little flexibility for the States to meaningfully influence inflation.’

Inflation in this cycle is driven by food and energy prices alone but what is critical is that wage inflation is not allowed to gain traction to send us into the wage/inflation spiral that existed twice in the 1970s, said Mr Meader.

‘No one wins from that scenario.

‘Given that we have full employment, it will be difficult for employers to hold back wage growth but I would imagine that many businesses simply will be unable to afford to put up their wage bill by 5.5% or more, when other costs are rising for them.

‘It is an uncomfortable time for businesses and the consumer but so far we have been well insulated from the harsher effects being seen in the UK.’

While the inflation rise wasn’t exactly good news for most, the important thing was to focus on the positives, said Ernst & Young partner Graham Parrott.

‘We haven’t had the drop in house prices that the UK has suffered, so it’s not all doom and gloom.

‘On the positive side, the economy is still doing relatively well despite life becoming more expensive for those on fixed incomes.

‘We have to do whatever we can to keep inflation under control, although I can’t help but sense that there is more bad news to come. We need to focus on the positives.’