What the inflation increase means for small businesses

April 2022 saw the highest rise in inflation for over 40 years, increasing by 9% in a month which as we've previously covered was the highest on record since 1982. This increase comes during an escalating cost of living crisis as fuel, food and other costs continue to rise with inflation.

The Office of National Statistics, known as the ONS, which measures the inflation on everyday items, have recorded this significant increase and whilst they impact households within the UK, they directly impact small businesses too. We explore inflation and its impact on SMEs as well as what opportunities it can bring too.

What Is Inflation

Inflation, an increase in costs of fuel, energy, food etc, is a normal part of a country's economy as people buy, sell and trade. The idea is if prices are expected to rise, consumers will buy now instead of waiting as they worry about waiting and prices increasing.

However, inflation can go the other way too and become too low as consumers don't spend as much money as the cost of living becomes too high. This has a direct impact on businesses as consumers are either put off spending their money or businesses struggle to keep prices competitive as the cost of running a business rises.

At 9% as of June 2022, inflation continues to be at a record high for several reasons including COVID19 recovery, the war in Ukraine and ongoing supply issues after Brexit and COVID19.

Negative Effects Of Inflation On Businesses

The rise in inflation doesn't just hit businesses financially but it can have a negative effect on deliveries, supplies and even staffing. Small businesses that have employees will also be impacted by inflation as the rise in costs impacts wages as well as labour shortages which have been increasing since COVID-19. Other negative effects of inflation for SMEs include:

  • Higher costs for materials
  • An increase in energy prices for daily running costs
  • Higher wholesale prices
  • Increase in fuel costs

Generally speaking, this sharp rise in inflation has impacted nearly all aspects of running a business and if you're an SME owner having to absorb the costs from all angles, inflation can feel rather negative. It's important to note that inflation isn't all negative either, with inflation bringing opportunities too.

How Does Low Inflation Affect Businesses

As we've previously mentioned, when inflation is lower it encourages people to spend more which is particularly good for smaller consumer businesses as people are more likely to buy now, save later. Lower inflation can also help smaller businesses with small price increases as it becomes absorbed in the general economy and people expect to spend a bit more.

Lower inflation can also mean a loss for small businesses as it's more difficult to increase prices for goods when consumers expect them to remain low. For goods businesses, lower inflation means absorbing costs elsewhere which can have a negative impact on companies.

How Inflation Impacts Businesses

Inflation rising causes a cost of living increase which impacts businesses in both positive and negative ways. With employees facing an increase in living, they need wages that can match the increases as well as cover other rising costs such as transport. Small business owners also have to consider a rise in import/ export, supplies and the general running costs as these are all directly impacted by inflation.

Inflation Over the Next 12 Months

According to the Bank Of England, inflation is going to continue to rise over the next 12 months which is mixed news for both small businesses and consumers alike. In their statement, the Bank of England have attributed this partly to the ongoing war in Ukraine and the predicted energy cap rise in October 2022;

“Looking further ahead, we think this means there may be a rise in the price cap on energy that changes in October 2022. That's the main reason we think inflation is likely to rise to around 10%.”

As an official financial guide, The Bank Of England isn't able to control inflation or have an impact on its rise and fall but can control the bank rate. This helps with savings, loans and other financial products which can help small businesses and consumers in a time of financial uncertainty.

If you're preparing your business to absorb rising costs over the next 12 months or want some financial advice about running your business to help save on certain expenses, we're here to help. We can offer a business valuation service which can help you understand how you're doing financially and understand your position for grants and raising capital.

Contact our team today for more information on how we can help.

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