Inflation Rates: What does this mean for Businesses?

Published on Wednesday January 5, 2022

Inflation in the UK ended 2021 at a ten-year high of 5.1% – surpassing City forecasts of 4.8% and leaving businesses in a difficult position as production costs soared.

December recorded the fastest rise on record in production costs after inflation soared from 4.2% in October. However, British companies are trying to resist passing on the burden of higher costs to customers – after research revealed stiff opposition from fed-up consumers to any more price hikes.

Bank of England officials had forecast a gradual rise in inflation to 5% by April 2022, so the sudden increase at the end of 2021 sent shockwaves through the economy.

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When was the last spike of inflation rates?

UK inflation is at its highest level since September 2011, when the last spike to 5.2% occurred. Ten years ago, an increase in VAT to 20%, higher import costs and higher energy prices and other commodities were blamed for driving inflation up, as they spread through the supply chain.

In 2021, prices rose across the board, with significant increases in petrol, food and both new and used vehicles. In November, the price of petrol reached a record high, while a shortage of computer chips pushed up the cost of cars further.

Economists at the National Institute of Economic and Social Research believe inflation is likely to remain above 5% throughout the first half of 2022.

 

How will this affect consumers?

Anti-poverty campaigners and trade unions fear the rise in prices will hit household living standards, particularly for people who are already on the poverty line. Workers are likely to see their disposable income reduced and vulnerable families will receive less for their money in the supermarket.

Moving forward, businesses will have to be mindful of how the high inflation rate could affect them. Many have already increased the prices of their products or services to make sure they’re covering the costs.

According to the Office for National Statistics, housing and household costs rose by 1.28% to their highest level since 2009 in the 12 months ending November 2021. The high costs of gas and electricity accounted for the bulk of the rise.

The cost of buying a used car shot up by 31.3% – the biggest individual rise in any sector. The ONS cited increased demand when car dealerships reopened following the most recent lockdown of 2021, combined with a global shortage of semi-conductors affecting new car production.

Other price increases in the same period included: petrol and diesel up by 5.1%; clothing and footwear +1.1%; food and non-alcoholic beverages +1%; and alcohol and tobacco +2.6%.

Petrol prices rose to an average 145.8p per litre in November, up from only 112.6p a litre twelve months earlier, while diesel was up to 149.3p a litre. These were the highest recorded prices on record.

Senior economists at the Resolution Foundation think-tank suggest 2022 will be filled with “acute economic pain” in parts of the economy, while there will be a UK-wide “living standards squeeze”.

 

How does it affect businesses?

Businesses are struggling to keep prices as low as possible, due to risking a consumer backlash with continual increases in the cost of living. However, if they don’t make any changes, there’s a danger they will suffer a loss of profits – and even a loss of their business altogether.

The government’s decision to increase employers’ National Insurance contributions in April 2022 will further fuel the inflation fire, causing more budgeting headaches, particularly for SMEs. They need to assess their finances now and determine where they can make changes, before it’s too late. These can include reducing outgoings, such as looking around for the best deals and changing service providers, for example.

Good financial organisation is the key to reducing costs and increasing savings. Businesses must scrutinise the advance planning of investments, ongoing costs and revenues in more detail than ever before. They need to identify any changes that can help the self-employed make invaluable savings.

Recording all financial transactions to spot unnecessary costs can be a good place to start. This could be a good time to enlist the services of a professional accountant to assess your company and analyse its regular income and expenses to implement a tailor-made savings strategy.

An accountant can help you get back on track with your businesses’ outgoings and profits to help you survive the economic crisis. Please contact DL Accounts for information on how our professional team can help you.

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