The UK’s rate of inflation jumped to 10.1 per cent in July, the first time it has registered a double-digit annual increase in more than four decades.
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 10.1 per cent as of July 2022.
Food price inflation hit 12.7 per cent in July, the highest rate in the category for more than 20 years.
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 on 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, the war in Ukraine and the various effects caused by both.
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. 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 better profit margins. But don’t take this decision lightly, as customers may be used to current prices so when considering and announcing any increases in price this needs to be delivered in a timely manner with a clear explanation to encourage understanding and retain client support.
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. Alternatively, you can consider hiring our services to evaluate and analyse your business to improve efficiency and profitability through mitigating wasted time and resources including capital resources.
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 should also create a new cash flow forecast and do a fresh budget.
Explore Opportunities. There are likely to be opportunities that you may not have considered. Good quality, thought-provoking questions that are directed to explore and discover the opportunities that may otherwise be out of your awareness. Having an experienced and highly skilled business coach will help you unlock opportunities you may not have otherwise noticed or considered. Contact us now to find out more.
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”, the central bank now believes inflation will continue to increase 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.
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 a recent survey by Simply Business.
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.
Under pressure, many businesses understandably retreat. This, whilst it may be an understandable reaction is not the best response. Having the right support to explore the opportunities that exist is what’s required and when you know and understand what these are you must test and then go on the offence. Having a high integrity and highly skilled business coach can make all the difference in achieving success through challenging times. Contact us today if you’d like to explore how we can help you with this
How is rising inflation affecting your business? What challenges have you faced and how have you overcome them? Let us know in the comments below.