How much of higher costs will firms absorb?

Companies’ margins are starting to bear the brunt of the exchange-rate induced rise in costs. And given the deterioration in consumer confidence, slower employment growth and the strong competitive environment, we suspect that retailers may not be in a position to put in place sharp increases in the prices that they charge consumers this year. Of course, retailers’ reports, anecdotal evidence and the inflation figures themselves, will allow us to monitor the extent to which retailers are absorbing these higher costs in their margins in the quarters ahead. But for now, this provides us with one reason why CPI inflation may not rise too far above its 2% target this year.