After hitting an expected peak in September, inflation has been quickly replaced as the focus of business and consumer concerns by the threat of protracted recession.

A longer than expected downturn, which analysts at Oxford Economics among others now assess to be a clear possibility, would be characterised by a further decline in the housing market and in consumer and business demand, company closures, rising unemployment and the possibility of deflation. The widely mooted policy responses include further, large cuts in interest rates and – controversially – a boost to demand by increased government spending on construction projects.

The latest rise in consumer prices, which was driven largely by higher energy bills, was accompanied by news that the annual rise in factory gate prices, an indicator of future inflationary pressures, eased from 9.1% in August to 8.5% in September. And manufacturers’ input cost inflation fell from 28.8% to 24.5%. However, input costs and output prices for wood and wood product suppliers rose to 7.3% and 4.4% respectively.

High-street sales

In the high street, furniture prices eased to a yearly rate of 5.8% but this did little to boost the reluctance of consumers to spend on non-essentials.

The CBI says that retailers overall continued to struggle in October and a third of furniture outlets reported lower sales volumes than a year ago.

Official figures on retail furniture sales reveal an annual decline of 8.5% in September, on a seasonally adjusted volume basis, while the unadjusted decline in value terms was 4.2%. Revised sales figures for August suggest an 11.5% annual volume fall, and a 6.7% downturn in the value of sales.

Newly released data suggests that the value of consumer outlays on furniture in the second quarter of 2008 was up 3.2% on the same period last year, but remove the effect of price increases and the volume of sales was down by 1.5%.

Figures on furniture imports indicate that volumes rose by 7% annually in the second quarter, while British manufacturers achieved an 8% yearly rise in furniture exports. The latest official estimates of total UK furniture output point to a contraction of nearly 6% in the year to August.

The downturn in demand for furniture reflects the parlous state of the housing market, where the number of new home loans is down 59%. According to Nationwide Building Society’s chief economist, “falling house prices, rising unemployment and continued turmoil in financial markets are likely to mean that [consumer] confidence will take some time to recover”.

Construction purchasing

Evidence from purchasing managers in construction, polled by Markit for the CIPS, is that activity in the sector fell again in September and at a faster pace than in August. Rates of decline accelerated in both the housing and commercial sub-sectors. The new orders index posted the second lowest reading on record, “indicative of a substantial contraction”.

The Royal Institute of Chartered Surveyors warns that the government’s target of building two million new homes by 2016 now looks increasingly out of reach. This follows news of significant declines over the past two quarters, with only 66,220 homes completed in 2008 so far, and a fall to below 25,000 per quarter likely by the end of the year. Senior economist Oliver Gilmartin concludes that the outlook for the construction industry is “extremely bleak”.

And official figures on the level of orders placed for new construction do little to enhance prospects for sales of timber and timber products. The seasonally adjusted volume of orders for private housing fell by 48% in the three months to August compared with the same period in 2007. Orders for commercial buildings, such as shops and offices, were down 39% annually.