David Prosser: Give the car dealers a clear road

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Outlook One reason inflation did not fall below 1.8 per cent during July was that car prices rose over the month. That might seem odd in an industry where sales have been plummeting, but car makers had been warning for months that the declining value of the pound left them with little choice but to raise showroom prices in the UK.

Still, the increases don't seem to have been a problem for consumers. We already knew July was the month in which car sales in the UK registered their first monthly rise for a year, and the car dealer Pendragon added yesterday that it was finally seeing a recovery begin. It wants to see the Government's scrappage scheme extended until next spring in order to ensure that it doesn't falter.

In fact, car prices have risen so sharply this year that many models are more expensive now than before scrappage was introduced. As has always been the case in the car world, if it were purely an economic decision, most drivers would be better off buying a nearly-new car than a showroom model.

Still, without scrappage, new car prices would be even higher, and there is no doubt that the scheme has had a considerable impact on sentiment. People buying new cars think they're getting a better deal and are therefore encouraged to pay up.

It's worth granting Pendragon's plea for an extension for another reason too. On all but the cheapest cars, the Government's £1,000 scrappage contribution comes back to it in the form of VAT that would not otherwise have been earned. The cost of the scheme is therefore minimal. Put another way, the only reason not to extend scrappage would be that you think new car sales can survive without it. That seems a premature call to make.