Tag Archives: Business

The Changing Way we Work & Live – part 3

Posted on 21 May 13 | 6 Comments
English: Miniature turbine 3D print from Rapid...

English: Miniature turbine 3D print from Rapid 2006 in Chicago, Illinois. (Photo credit: Wikipedia)

The first in this series of posts looked at how technology advances are enabling location independence for people at work, and the second looked at some of the socio-economic impacts of this move. In fact, the changes are potentially even more widespread further into the future, as a recent MindBullets post discussed.

Essentially, what this post suggests is that in the next decade or so, a combination of 3D printing – that technology is already available, albeit in a somewhat rudimentary form still – and cheap robotics will render manufacturing as we know it obsolete.

What’s more, this combination of technologies will make the production lines of old irrelevant as we move to true user choice in every product. We all remember the early days of the mass produced car, when Henry Ford suggested that customers could have the Model T in any colour they liked, so long as it was black. Contrast that with today where the buyer has, literally thousands of combinations of colour, internal and external finish, engine and accessories available to make a vehicle unique, or at least highly individualized. In the future, there will be no limit to the choices available as each product will be built/printed to your exact specification.

The impacts of this are, of course, dramatic – imagine the impact on China if its low-cost manufacturing prowess is no longer needed as it is faster and cheaper to make items at/near the customer. What will the effect be on the economies of countries like China, Mexico and others where a largely unskilled labour force has provided economic growth through mass manufacturing? And what will the consequent ripple effects around the world be as a result?

What, too, will be the impact on the logistics and transportation industries if there is no longer the need for transporting all the freshly-made products around the world? Shipping, air, road and rail transport, and warehousing will all undergo massive changes and many companies that are household names will have to adapt radically or disappear.

The Amazon of the future, for example, instead of having huge warehouses filled with a multiplicity of product and a logistics operation predicting demand and ensuring, so far as is possible, just-in-time delivery from its vast range of suppliers, will have a series of printing/manufacturing modules and will create products to order in a matter of minutes – and the only transport needed is to the consumer. As prices of 3D printers continue to fall, imagine a world where these are in every home, negating even this ‘last mile’ transportation.

There will, of course, still be the need for some level of transportation – the raw materials for the 3D printers and robotic manufacturing operations, but this will be much less onerous than the transportation of today.

There is, of course, still one area that 3D printing and robotic manufacturing has not solved – organic material. This means that food – fruit, vegetables, meat, eggs, fish and so on – will still, for the foreseeable future at least, need to be transported from the farms to consumers in some way. Here, too, we’re seeing huge change today as increasing numbers of consumers buy this online, bypassing the need for physical supermarkets and shops, and we’ll look at the effects of all this online shopping in the next part of this series.

There’s no question that the current advances in 3D printing and robotics will dramatically change the way products are made and delivered and the effects of this on companies and countries will be massive. Technology is really causing the pace of change to accelerate more and more quickly – the future just gets more and more interesting.

Note: I first posted this on the Business Connexion blog on 8 April.

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The Changing Way We Work & Live – part 2

Posted on 12 April 13 | 5 Comments
Urban Decay

Urban Decay (Photo credit: pmorgan)

The previous post showed how technology is enabling location independence for the workforce for the first time since the Industrial Revolution created the need for urbanisation.

Smart devices, such as smartphones and powerful tablets, are providing people with the ability to be fully productive at customer sites, from home or wherever else the demands of the role take them, with sales of these devices outstripping those of PCs for the first time in 2011.

Estimates vary widely, but it seems that at least 10% of the workforce today works from home rather than in an office, and estimates are that this could reach as much as 60% in a decade. What’s more, contrary to what many employers feared, it seems that working from home increases productivity noticeably – some 10-15%, in fact – due to people working longer with fewer breaks and having less interruption.

But this location independence has far wider implications, too:

  • Equipment purchases – concomitant with location independence, people want to have their own choice of devices: the Bring Your Own Device (BYOD) phenomenon.  Initially concerned about the security implications of people using their own devices, companies have realised that the cost savings more than compensate for the additional security/monitoring required, and the employee is happier, too. Of course, this has ripple effects on the supply chain as companies no longer need to buy large volumes of end-user equipment due to the users purchasing their own, normally from the retail channel. This is exacerbated by a move into the cloud and companies consequently no longer needing as many servers and storage systems as they simply use these “as a service” from the cloud providers – again impacting the supply chain for such equipment.
  • Pervasive communications – of course, for location independence to work, people need access to fast communications links wherever they are. This is continuing to drive the roll-out of faster, cheaper mobile and fixed-line communications throughout the country. This trend will continue – more bandwidth, cheaper, driving the need for even more as applications increasingly take advantage of whatever is available. Inexpensive, or even free, video conferencing is quite normal now – replacing meetings in offices – and the use of vide for demonstrations, sales tools and so on fuels an ongoing demand for even more.
  • Housing prices – one issue that’s seldom mentioned when talking about location independence is the impact on house prices. As people need to cluster less around major metropolitan areas to work, so this must impact prices in areas that were in very high demand for the reason of convenient access to work. Could this be the catalyst that finally bursts the London property bubble? Could it also cause prices to increase in more remote, cheaper areas as people opt for quieter spots? And then what about the impact on transport – less commuting means fewer passengers on the trains and tube. Not only might this mean people actually getting seats when commuting, but it may force the operating companies to reduce prices to try and attract people to use the services.  The socio-economic impact of this location independence could be huge.
  • Holidays / Leave – another interesting result of the increasing move to people working from home is the effect on holidays and leave. Not only is it increasingly difficult to monitor when people are “at work” or not, the lines are also blurring between work and leisure time. All of this creates headaches for companies when it comes to such things as people taking time off. A number of companies, particularly in the USA, are now moving away from formal leave allowances and the administration that goes with this, opting instead for employees being able to determine their own leave requirements, provided they get their work done. Not only does this further improve motivation and morale but improves company balance sheets as they no longer have to provide for paying out against untaken leave – and for large companies, these amount can be substantial.

Just as the Industrial Revolution led to urbanisation in the 18th and 19th centuries, could technology and location independence lead to the reduction of these large conurbations in the 21st century?

One thing’s certain – work will never be the same again.

Note: I first posted this on the Business Connexion blog on 4 Mar.

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The Changing Way We Work & Live – part 1

Posted on 5 April 13 | 6 Comments
Laptop on beach


Laptop on beach (Photo credit: Wikipedia)

There’s a revolution under way that is gaining momentum, and yet doing so in a way that although we scarcely notice the changes from day-to-day, when we look back a few years we can see they’re enormous.

This revolution is in the way we work and live.

Ten years ago, working from 9 to 5 in an office was overwhelmingly the norm, and when we left the office at 5 we effectively switched off from work until we arrived back at our desks the next morning.

Today, this is very different and the lines between work and leisure are increasingly blurred, impacting almost every aspect of life from where we work, to how, when and even to our holidays, and yet we’re really still in the early stages of this revolution.

It all came together with the convergence of the Internet, smartphones and notebook PCs in the mid-late 90s – the Internet becoming increasingly pervasive once a user-friendly browser, Netscape, was released in 1994, the term “Smart Phone” first being used in 1997 and, of course, the increasing power and affordability of notebook PCs throughout the 90s.

By 2000, this convergence of technologies was enabling people to become properly location-independent – accessing email at any time, from anywhere, and moving from this to being able to run an increasingly wider list of applications on these portable devices: initially the notebook PCs, but increasingly on smart phones as the performance of these devices improved. For the first half of the decade, though, such location independence was still the preserve of the ‘early adopters’ as the technologies continued to evolve and the cost and availability of bandwidth improved, with such ‘early adopters’ being equipped by the companies for which they worked.

The introduction of the iPhone in 2007 brought about the next significant jump in working practice – or rather, the introduction of the Apple App Store a few months after the iPhone brought about this jump.  The iPhone and App Store enabled people to choose from a wide range of applications that enabled their smartphones to be so much more functional than had been the case to date.

Suddenly, Apple moved into the mainstream of intelligent device use, and people started demanding that they be allowed to use their own smartphone (the iPhone, in this case) rather than the company-supplied one, (most often a Blackberry at that time). People liked the new applications that were available, and wanted to use these at work as well as in their leisure time.

And then, in 2010, came the iPad…

This combined sufficient power and screen size to effectively run most business-level applications that people needed to access when on the move, with battery life than enable all-day working – a major limitation of notebook PCs that typically could only run for a few hours.

For the first time, people could work remotely from their offices all day without worrying about power source availability – true location-independence had become feasible.

Of course, things continue to evolve. PC makers, seeing massive market share being taken by these portable smart devices (phones and tablets), which outsold PCs for the first time in 2011, have countered with Ultrabooks – full-power notebooks that utilise solid state disks and great battery life to provide full PC performance with all-day power. Tablets, too, get more powerful and functional, while bandwidth continues to become more pervasive and cheaper.

The “Bring Your Own Device” movement is now taking off – users insisting on being able to work with their own choice of devices and companies recognising the cost savings, and motivational advantages of allowing this.

Today, it’s entirely commonplace for employees to have no real office address: their contact details show a mobile number alone, and they work from home, from client sites and from wherever else is most convenient. They come together over video conference calls from multiple places, and share knowledge using a multiplicity of internet-based tools.

And this trend will keep accelerating, with interesting social consequences likely to emerge as society increasingly reverses the location-dependence introduced with the Industrial Revolution.

I’ll explore some of these, together with the technology issues driving them, in future posts.

Note: I first posted this on the Business Connexion blog on 11 Feb.

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“Drowning in Data”

Posted on 22 October 12 | 6 Comments
Data Center

Data Center (Photo credit: bandarji)

I’ve just read a fascinating article in The Times of 22nd October which starts out by saying, “The world is ‘drowning in data’ and computing companies are running out of space to store it…”

Some of the interesting numbers that came out of the article:

  • By 2016, the number of devices connected to the internet will be 3x the global population (so, well over 20 billion devices) – that’s up from 9 billion today, itself an eightfold increase in seven years, with the num

    ber expected to reach a staggering 50 billion by 2020.

  • Global IP traffic in 2016 will reach about 120 exabytes / month. That’s 120 million terabytes (or, if you prefer, 120 billion gigabytes) of data every month – and almost 10% is expected to be mobile data.
  • And, if you think YouTube has too much video on nowadays, by 2016 estimates are the 20 000 hours of video will cross the internet every second!

Already this year we’ve seen the explosion of tablets and smartphones – not just in numbers, but in data traffic, too, with the average tablet expected to handle some 4 gigabytes of data every month, up 8x from last year, and the average smartphone to be handling around 2.5 gigabytes of data a month, about 16x more than last year.

This pace of growth indicates both devices overtaking laptops for data traffic in the next year or so as laptops are ‘only’ handling around 7 gigabytes a month, little more than 3x up on last year.

So, we’re creating vast amounts of information but what are we doing with it all? Seemingly, it’s going into enormous storage pools as another recent article in Microscope (19th October) pointed to a significant skills gap when it came to the ability of companies to handle this level of information – ‘Big Data’ as it’s referred to.

Although the article points to research showing that almost 2/3rds of UK business understood the competitive advantages of being able to utilise this data (nearly twice the number of firms in 2010), less than a quarter believe they have the ability to analyse all the unstructured data streaming in.

So, not only do we have a growing issue with storing all this exponentially increasing data traffic, but we’re largely unable to do anything with it.

It’s going to be fascinating to see the business models that spring up to manage this in the next couple of years.

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Can the Olympics Boost British Business?

Posted on 11 August 12 | 2 Comments
Olympic Judo London 2012 (2 of 98)

London 2012  (Photo credit: Martin Hesketh)

An interesting phenomenon has hit Britain over the past 2 weeks – the traditional British reserve has been replaced with enthusiasm and a sense of national pride I’ve not seen here before. What’s more – the normally omnipresent negativity about almost everything (not just the weather!) has been quietened to a large extent.

This gives me great hope. Can we draw on this new-found upbeat attitude and start to pull the country out of its recession?

After all, markets are driven at least as much by sentiment as anything else, and a positive sentiment among the people here will inevitably lead to a strong upturn.

So, what lessons have we learnt this month?

Firstly, and very importantly for the future, that competition is healthy after all. For far too long here, and in some other countries, governments have discouraged competition on the basis that it is unfair to those less able. Hence the ludicrous situation of school children, for example, progressing through school regardless of whether they pass or fail their exams, and exam pass marks being lowered, too – the reason we have such huge numbers of school leavers who are functionally illiterate and innumerate. And then wonder why they cannot find, or keep, a job.

Secondly, celebrate success. It seems to me that the news services focus on the negative, and ignore the positive. With the Olympics they were even starting to be accused of jingoism, such was the positive tone of the UK TV services! I realise that disasters sell more newspapers and TV viewship of news channels increases, but it really is not necessary to focus on the negative / bad news about everything all the time. Hopefully, the record viewership and readership during the Olympics will show that good news also sells… And there is good news on the business front – not just bad. There are many success stories, large and small, from Jaguar-LandRover’s expansion to over 300 000 new businesses starting this year – some of which will become the market-leaders of the future (there’s an interesting correlation with market-leaders having more often than not started in periods of recession/downturn).

Thirdly, sport is good for everyone. Britain is already one of the most obese nations on earth and the costs of this in both human and monetary terms are massive. By making sports compulsory for school children – a minimum of three afternoons a week would be good – they develop habits that will stand them in good stead throughout life. It not only reduces the issues associated with obesity, but encourages both team spirit and competition – two things that are critical for overall success in life.

Fourthly, a sense of national identity and community, and pride in this, is good – look at the great work done by the army of volunteers! It really is time for the “Great” to be put back into Britain in the minds of its people. It turns out that not only is Britain third overall in the medals table, but has the best ratio of the all-important Gold medals to GDP of any country (50% better than the next closest) and one of the best ratios in terms of population size, too.

We’ve a unique opportunity to take these lessons and move forward strongly. To move away from a grey society where competition is bad, winning isn’t important and there’s no pride as a consequence. The results will be not only good for business, but a stronger, healthier and happier society, too.

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Apps – the next frontier

Posted on 18 October 11 | 2 Comments
iPad is a Wi-Fi 64 GB version (another one beh...

Image via Wikipedia

One thing you can be sure about in the IT industry – change. Lots of it, fast and often in unexpected directions.

After 20 years of PCs in various forms increasingly ruling our lives, getting smaller, quicker, more capable software, and so on, suddenly there’s a change afoot that has the potential to eclipse the PC in terms of the effect on our lives.

I’m talking of course, about relatively small mobile devices and the apps that run on them.

Yes, people are buying ever-increasing quantities of tablets with new models coming out on a monthly basis. Smart-phones, of course, are the other half of the hardware equation, and rapidly becoming the dominant phone device in wealthier economies. But without a substantial body of applications – appropriately abbreviated to “apps” as they are relatively small and simple – these devices would be little more than curious ‘toys.’

For those of you that like statistics, how about these:

  • App market size (value) in 2012 – $17.5 Billion, according to GetJar. This is huge, but even more amazing when you consider how many apps are free.
  • App downloads – 4.5 Billion in 2010, 21.6 Billion in 2013, says Gartner. Huge growth, and really underscores the GetJar forecast for the market value.

Recognising  this opportunity, there are expected to be over 10 million app developers by 2016, and we can expect a bewildering choice of, perhaps, a million different apps on each of the major operating systems/platforms as soon as 2014.

Of course, today, the vast majority of apps are for entertainment purposes: games, music, video, etc. But as tablets and smart-phones become increasingly accepted by business, this will change. We can see this starting already – on the iPhone, fully 65% of the top 100 apps are games, whereas on the iPad, this is down to 45%, with business, news and productivity apps showing marked increase on the tablet.

And this is the key behind the phenomenon. Businesses are realising that by allowing users to utilise their own smart-phones and tablets on the company network they’re saving enormous sums of money, both directly (users buying their own equipment) and indirectly (the lifecycle of corporate IT assets can be longer as these smart, mobile devices take some of the load).

What’s more, apps are taking us back to basics. Away from the massive, resource-intensive applications we’ve become used to – full of features that we don’t use, but which helped justify the upgrade (or even initial purchase price) – and towards small, focused apps that just do one thing, but do it well. A sort of RISC approach to software, as we’ve seen on processors.

In the next few years, look for company-owned “App Stores” to become the norm, providing users with a variety of tools to increase productivity by accessing company systems from their mobile devices. Reducing costs for the company and increasing productivity.

Is your business looking at how to take advantage of this next frontier?

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Early Birds Make the Best Decisions

Posted on 25 August 11 | 4 Comments
Board Meeting.

Image via Wikipedia

A fascinating piece by John Tierney in the NY Times explored the concept of “Decision Fatigue,” concluding that people faced with making a number of decisions do so less well as the day wears on.

In studies with Roy Baumeister, a clear correlation was shown between the quality of decisions made at a point in time and the number/difficulty of decisions subjects had been required to make beforehand.

These studies explain the anomalies in, for example, parole being granted to prisoners by a parole board – those whose applications were heard at the start of the day, or immediately following a break for nourishment, were considerably more likely to succeed that those whose applications were heard at the end of a session, or just before a break.

Car salesmen were able to increase the value of the options taken with vehicles simply by altering the order in which the options were presented: once decision fatigue started to come into play, the buyers were more inclined to simply go with the recommended/default choice, even when it was more expensive and, potentially, less suitable for their needs.

Supermarkets have long had their ‘impulse racks’ at the checkout counters, but the real reasons these work has only recently been understood – shoppers are fatigued from all the decision-making during the shopping process and so are less able to rationally decide against a tempting treat when this is put in front of them.

What transpires from the studies is that the process of decision making depletes glucose levels in the brain and that this affects the way the brain works. In essence, some areas of the brain will work better for longer: the reward centre area continues to function well, while that controlling impulses weakens. So, our buyer who has been through a number of decisions in deciding on options for the new car will look at fewer and fewer factors in coming to a decision and be more prone to impulse – for example, “those leather seats look great.”

Interestingly, it was shown that replenishment of the glucose levels quickly restored decision-making ability, so if our buyer chewed on some sweets during the process he/she might well save some money. Of course, using sweet substances for instant glucose replenishment is just a temporary solution as the glucose derived from sugar is quickly used up – that from complex carbohydrates and proteins providing a steadier supply over time – but it certainly can help in tough situations.

If you need a decision from your boss, choose your time carefully, and maybe soften him/her up with a piece of chocolate at the start of the meeting so the glucose can be absorbed before asking for a decision, unless of course the decision you want is one that does not require change to an existing situation – in which case low glucose levels will favour the status quo.

The bottom line seems to be that you should make your biggest decisions at the start of the day (assuming you have breakfast, of course!) or after a healthy meal. In board and management meetings where there are many decisions to be taken, ensure the participants are suitably nourished and their glucose levels are maintained. As the article recommended – don’t make decisions on restructuring the business at 4pm…

 

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The iPad as a Business Tool

Posted on 17 August 11 | 3 Comments
Image representing iPad as depicted in CrunchBase

Image via CrunchBase

Some 6 months ago, I posted a discussion on LinkedIn to ask advice about how practical a tablet – specifically the iPad – would be for business use on the road and received enough advice to encourage me to take the plunge. As a now-avid user of the technology, I thought it would be useful to post my experiences and the tools I use to assist others.

Background

Like many people today, my work involves frequent travel to London as well as meetings within, normally, a two hour radius of my home-office.

My excellent notebook computer, as is normal, cannot run for a full day without recharging and this then means lugging around a heavy bag with power supply, cables, etc. – not at all comfortable – while my smartphone is simply too small to do “real work” on.

With a 10-hour battery life and a 10-inch screen, the iPad overcomes the shortcomings of both notebook and smartphone – the question was just how usable it would be in a Windows environment like mine.

My Hardware Environment

Taking advice from several people I opted for the WiFi version of the iPad, together with a 3G data package from “three” giving me 15Gb of data a month with a MiFi device and costing just £18.99 a month.

The money I saved on not buying the 3G version was spent on the extra memory – the 64GB model.

Having seen a few other people using their iPads, I went for three “must-have” accessories, too: screen protectors, a capacitive stylus (from Boxwave) and a leather case with built-in Bluetooth silicon keyboard from LuvMac.  The LuvMac case/keyboard is great – not only protecting the iPad but giving me a built-in keyboard for very little weight, so freeing up the whole of the screen space for viewing. With about 100 hours of use out of a charge, I only charge it once a week.

My Software Environment

This was the area that most concerned me. Fortunately iPad apps are fairly inexpensive in the main, so if you make a mistake and get the wrong app for your needs it’s not a huge problem.

The applications I now use all the time (after some experiments) are: Dropbox, DocsToGo Premium, iAnnotate PDF, zipThat and – to access my Home-Office PC – Wyse PocketCloud Pro. Word and Excel files work very well with DocsToGo, although PowerPoint is less successful unless your slides are very simple and have no background pictures, so there’s a great opportunity for somebody to develop a PowerPoint-compatible app. I use both the Kindle app and iBooks for e-books and have a great business modeling app called Business Model. I’m also experimenting with a few other apps for Mind Mapping, general notes/drawing, etc., but haven’t yet settled on anything in particular. Of course, I have a few newspaper and news (TV) apps, too.

Email and Contacts on the iPad are very basic – workable, but not something you would want as your primary system. An Outlook client for iPad would be first prize (especially as I link to multiple mailboxes on various devices, including my smartphone. Another great thing would be a Google Chrome or Firefox app as Safari on the iPad is pretty clunky.

Setting everything up for my home-office environment was extremely easy and the RDP (Remote Desktop) links to my Home-Office PC from within the house (and garden) are very fast. Getting past my Sky Router and my internet security system was more challenging but that’s also now working well and I can access my PC when on the road if I’ve forgotten to put something in my Dropbox folder.

Conclusion

For me, the iPad definitely paid for itself in just a couple of months. I not only use it on the road all the time for email, etc., but also find myself using to take notes in meetings and events instead of using paper – so notes are immediately searchable on my PC, too.

If you have specific comments or suggestions for apps, etc., I’d be happy to hear them and share them through this post.

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Our Changing Lifestyle

Posted on 10 August 11 | 4 Comments
London

Many of you will have come across the various forms of the “Did You Know?” or “Shift Happens” slide shows over the past decade or so – there are several versions on YouTube, of course.

Regardless of how accurate you believe the figures presented to be, the facts of the matter are that the nature of work is changing more fundamentally than many people yet believe – and is doing so more quickly than any major change that has gone before.

Urbanisation really came into its own with the Industrial Revolution: although towns/cities had existed almost from the dawn of civilisation, it took the centralising of manufacture to drive the majority of the workforce into conveniently situated accommodation near to their work.

Now, though, two major factors are driving the next big change in the way we live:

  • The increase of service industries – in the US and the UK, this already accounts for around 77% of GDP, v 22% for “traditional industry,” and even in China service industries are fast approaching parity with “traditional industry” in GDP terms (44% v 46%).  Such “knowledge” work is far less location-dependant than manufacturing lines and their like.
  •  The increase in digital communication technologies and speeds which free us up from location dependence even more, as we can talk, meet (over video links), email, and so on from virtually anywhere, any time.

These factors are, of course, spawning ever-more smaller businesses focused on different niche market areas. Big business in many service areas is inefficient as management overheads lead to cost issues when compared with smaller businesses, which are also generally more nimble and able to adapt more rapidly to changing market conditions.

While the higher cost of property in cities was offset by the lower commuting costs which kept the populations of the cities growing, as people need to commute less to central locations so the need to live in a city diminishes and people become freer to choose where to live. Couple this with the issues over living conditions in crowded cities (the recent riots in UK cities underscore some of this) and a somewhat more rural residential lifestyle becomes attractive – less expensive, less crowded, quieter and less potentially dangerous.

The impact this could have on cities is enormous – property prices would drop as supply of properties exceeds demand and infrastructure investment would move elsewhere, following the people. Conversely, large-scale migration to more rural areas will create its own set of problems – residents objecting to large-scale growth (although the shop-owners won’t mind the influx of customers too much), crowded roads and creaking infrastructure which will have to be upgraded to handle the increased loads, and so on. District councils will start to compete with each other to offer the best combination of space (there’s no point moving from one crowded area to another), infrastructure, affordability and general lifestyle.

As location independence grows, the same, of course, should then start to happen at a country level. Some countries – Malaysia, for example – are busy today trying to attract retirees on the basis of lifestyle and costs, and so boost their economies through a relatively high-spending population. Can we expect to see a scenario in the next 10 years where countries compete to attract people on the basis of infrastructure, cost of living and general lifestyle, regardless of where the companies themselves are located?

What would this do for country citizenship, for taxation bases, social security networks and the like? Have you thought about where you would, or wouldn’t, like to live if you were able to be truly location-independent? How does your current country measure up?

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When Will Interest Rates Rise?

Posted on 11 May 11 | 2 Comments
The Bank of England in Threadneedle Street, Lo...

Image via Wikipedia

With the Bank of England having revised the growth rate down to 2.7% this year (from a previous forecast of 2.9%) and inflation rate up to peak at 5% in the fourth quarter (previously 4.5%), expectations are again growing for an interest rate rise in the near-term.

Of course, the classic economic theory is that a rise in interest rates reduces inflation as spend decreases and so demand-driven price rises are no longer a factor.

However, we’re not living in classical times. This economic slowdown – it can’t be called a recession as we’ve not had a further 2 quarters of negative growth – is persisting and there’s no real expectation of a marked change to lacklustre growth rates throughout the developed world. So it’s not demand that’s driving inflation but rather a number of external forces, including climatic conditions and wars, that have pushed up commodity prices. These won’t respond to a rise in interest rates.

So, given this, let’s understand who benefits from the current scenario and what this means for interest rates.

The main beneficiaries of the sustained low bank rate are:

  • The banks themselves – don’t confuse low bank rates with low interest rates for borrowing money. Certainly, the rates are lower than they were before the crash, but not as low as they should be, given the drop in the bank rate. In fact, looking at interest rates charged to companies and individuals for borrowings, the bank’s margins are extremely high. A margin of 3% to 3.5% (the difference between bank rate and lending rate) is normal – today it’s running somewhere between 5% and 7%, depending on your financial profile. The banks are, quite literally, “coining it” – just look at the new bonus rounds for evidence of this.
  • The government – the massive government debt attracts interest costs (they have to borrow the money). Historically, governments borrow money at, or extremely close to, the bank rate, so by keeping this low, the government reduces the amount of its budget spent on interest to service its massive debts.

Yes, homeowners can benefit to a degree, too – but the advantages tend to be a lot smaller in real terms for most people due to the structure of mortgages and the costs associated with moving between fixed and tracker rates, together with the fact that many people can’t change to take advantage of lower rates due to not having enough equity in their properties following the decline in values. And don’t forget that homeowners repaid a record additional £24 Billion on their mortgages last year – getting their mortgage values down ahead of any possible rise to cushion the impact.

So who benefits from higher inflation?

  • In a word: government. It comes back to the massive government debts that have been rung up in the past 10 years. One way to reduce the effective value of them is to allow moderate inflation into the system – simplistically, 5% inflation over 5 years reduces the effective size of the debt by 25%. Couple this with the increased tax receipts that come with inflation and you have a model to get government debt down much more quickly than would otherwise be the case.

So, given that inflation won’t respond to a rise in interest rates as this is not caused by high demand, and that the government and banks are the primary beneficiaries of having a slightly higher inflation rate and a sustained low bank rate, is it likely we’ll see an interest rate rise soon?

I think not – although I suspect the impact of a rise in bank rates may be felt less than generally expected. In fact, it might well lead to lending rates not going up at all as the banks would use this as a way to try to woo customers from each other, keeping lending rates where they were before – let’s face it, they have more than enough room in their margins to absorb a few modest rises in the bank rate.

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