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What does the high inflation rate mean for small businesses?

3-minute read

Sam Bromley

18 May 2022

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The Office for National Statistics (ONS) has released the latest inflation figures, announcing that the headline figure rose by 9 per cent in the 12 months to April 2022.

This is the sharpest jump since 1982.

On a monthly basis, inflation rose by 2.5 per cent in April 2022.

In the UK, the ONS measures inflation for everyday items by using the Consumer Prices Index (CPI).

Inflation measures how much prices for goods and services rise over time. But what does inflation mean for small businesses?

What is inflation?

Inflation is a normal feature of the economy. In general, it encourages spending. If prices are expected to rise over time, consumers will purchase goods now rather than wait.

But inflation can be either too low (meaning that consumers put off spending their money with businesses) or too high (meaning that businesses struggle to set prices as demand outstrips supply).

What is the current rate of inflation?

The current rate of inflation is 9 per cent.

You can check the current rate of inflation at the Bank of England. It changes monthly and is based on the Consumer Prices Index (CPI), which tracks the prices of everyday items.

This is called the ‘basket of goods’ and is kept updated with new items. Tinned beans and sports bras have been added in 2022, reflecting changing trends in diets and exercise.

The rising cost of gas, electricity and fuel is heavily contributing to increasing inflation.

The target rate of inflation is 2 per cent. The Bank of England says this is to keep inflation stable and to help “everyone plan for the future”.

If the Bank of England misses the target rate of inflation by more than one percentage point either side, they have to write a letter to the government explaining why.

Why is inflation rising?

inflation has been rising following the coronavirus pandemic and global lockdowns.

As economies opened up last year, people were able to spend their money again. Demand for certain goods and services increased, putting pressure on businesses and supply chains.

What’s more, lots of people decided to change jobs following the pandemic. These shifts in the labour market have led to higher wages, increasing costs for businesses, which eventually get passed on to the consumer.

And in recent months, the war in Ukraine and subsequent sanctions on Russia have led to more pressure on fuel and food prices.

Many EU countries rely on Russia for their oil and gas. With imports banned, they have to source oil and gas from elsewhere, affecting supply.

The ONS notes that the largest upward contributions to the inflation rate in April 2022 came from housing and household services (including gas, electricity and other fuels) and transport (including motor fuels and second-hand cars).

How does inflation affect businesses?

When prices rise, it doesn’t just affect consumers. As mentioned, wages increase as employees ask to be paid more to compensate for increasing inflation (or move jobs altogether).

Businesses are affected by supply pressures as they pay more to buy materials and products. They may have to wait longer until stock becomes available (and then face increased shipping costs and times).

Supply shortages for raw materials like timber can also impact prices. Last year we surveyed tradespeople to find out the impact of surging demand and labour shortages on costs.

You might have already experienced problems with your supply chain, as well as labour shortages if you’re looking for staff.

Consider these steps to tackle inflation:

Audit your prices. A fresh break even analysis could help you work out whether price increases can lead to a better profit margins. But don’t take this decision lightly, as customers may be used to current prices.

Audit your costs. Similarly, take a fresh look at your expenses to see if you can reduce them. Can you cut any inefficiencies? Lean manufacturing principles may help you find ‘waste’ in your current processes.

Come up with new plans and forecasts. As the world changes, your plans may need to change too. Take a look at your business plan to see whether there’s anything that needs updating. You can also create a new cash flow forecast and do a fresh budget.

The Bank of England thinks inflation will keep rising

While the Bank of England’s deputy governor previously said that “inflation may still prove temporary”, according to The Telegraph, the central bank now believes inflation will hit 10 per cent this year and go down next year.

This is because of the war in Ukraine as well as current lockdowns in China, making it difficult to import some items to the UK.

Simply Business’s UK CEO, Alan Thomas, said: “High inflation is squeezing small business owners while many are still in a crucial recovery period. The eye-watering cost of Covid-19 for SME owners, including lost work, earnings and loan repayments, now sits at a total of £109.6 billion according to one of our recent surveys.

“One in six also believe they will never recover financially from the pandemic. As a result, two in five (46%) SMEs are calling for long-lasting financial support from the government to help them get back on their feet after Covid-19.”

How is rising inflation affecting your business? Let us know in the comments below.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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