How are small businesses reacting to the inflation dip?

ONS figures released this week show that inflation slowed slightly to 3.1% in September 2021. We hear from SMEs about their reaction to the announcement.

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After months of rising inflation, the cost of living has slowed slightly in September, according to the latest Office for National Statistics (ONS) figures.

The Consumer Prices Index, which is released every month by the ONS, reported inflation levels of 3.1% for last month, compared to 3.2% in August. However, whilst the rate appears to be slowing, this number is still considerably higher than the Bank of England’s target of 2% and is expected to climb.

The news comes after we reported earlier this week that the governor of the BoE, Andrew Bailey said they would “have to act” if the rate of inflation continued. On Friday, the BoE's chief economist, Huw Pill added that he would “not be shocked” if the rate reached 5% or above in the next few months.

Below, we hear from UK SMEs and financial experts on how they’re feeling about the new rate.

What is the new inflation rate and what does it mean?

In March 2020, inflation sat at just 1.5%. Over the past 18 months, however, it has been rising steadily in the UK, triggered by increased government spending as a response to coronavirus.

The new rate is now 3.1%; a slight decrease on August’s rate of 3.2%. According to the report, the transport industry was the biggest contributor to price rises, as the price of petrol continued to rise to near-record highs last week.

As ONS analysis warns, this easing of the inflation rate is due to the government’s Eat Out to Help Out scheme. Because the rate is decided by the past 12 months, last month’s data has been influenced by the scheme, which ran in August 2020, and led to a decrease in prices.

It is likely the rate of inflation will continue to rise or stay the same in next month’s report. Speaking to the Financial Times, the Bank of England's chief economist Huw Pill warned the rate could reach 5% by early 2022, stating: “That's a very uncomfortable place for a central bank with an inflation target of 2% to be.”

Why does it matter?

Inflation refers to a general rise in the price level of an economy over a period of time. It has a direct impact on the cost of goods and services, making the cost of living more expensive. It can also influence interest rates – if inflation reaches a high enough level, interest rates will need to be raised, making it more expensive for SMEs to borrow money and source funding.

How are small business owners reacting?

In the midst of a supply chain crisis, exacerbated by business challenges like Brexit and the coronavirus pandemic, inflation has contributed to an increasingly expensive supply chain, causing woes for small businesses as costs soar.

Gillian Ferguson of Scotland-based Twisted Empire Bakes, an online confectionery store, told us: “The energy crisis and high cost of living are piling ever more pressure on top of already drowning small businesses. One of my main ingredients has gone up by 25% and I supply the hard-hit hospitality sector so can’t put my prices up. I bake for a living and I’m worried about keeping the ovens on. Happy Brexit.”

The general consensus amongst the SMEs we heard from was concern that higher interest rates would be introduced. Amongst the current chaos of the economic climate, most respondents felt this would be ill-timed.

Robert Walton is managing director of commercial interior specialist, The Lindhurst Group. Walton said: ”The economic recovery is too fragile to tolerate increased interest rates at this stage. While inflation is unhelpful, there needs to be institutional confidence to drive underlying growth. Unfortunately, we will be increasing prices for the first time in three years as margins cannot be eroded further if the business is to develop and invest for the future.”

Some had already taken precautions to minimise the harmful effects that higher interest rates, combined with other business challenges, might cause. These include introducing higher wages to ensure staff remunerations remain in-line with the cost of living.

Scott Gallacher, a chartered financial planner at independent financial advisers, Rowley Turton said:“Due to concerns about high inflation and potential labour shortages, we brought our annual wage rise forward to keep our staff happy. We are planning to absorb that cost rather than increase our fees. I'm not sure the Government raising interest rates would help, as inflation seems to be mainly due to supply issues rather than excess demand.”

Jez Lamb is founder of Beers @ No.42, a craft beer marketplace. Lamb said: “The answer to high inflation is simple for small business owners, right? Just whack up your prices to combat it and all's well. Sadly that doesn't work, as it risks losing you customers. It's alright for the big boys as they have the financial strength to keep their prices low, but small business owners, as ever, have to take a hit on their real-world income and spending power.”

How should SMEs respond to the new inflation rate?

Commenting on the new inflation rate, the below financial experts advised that small businesses should invest in a diverse range of portfolios in order to start saving money.

Scott Gallacher, a Chartered Financial Planner at Rowley Turton, an independent financial adviser. Gallacher said: “If you want to avoid your money being eroded by inflation, you’ll need to give up the certainty of cash deposits in favour of the ups and downs of investing. Of course, investment isn’t without its own risks and you should speak to an independent financial adviser who will be able to recommend the most appropriate portfolio for you.”

Joshua Gerstler is chartered financial planner at The Orchard Practice, a financial advisory firm. Gerstler said: “Over the past 30 years, for example, inflation in the UK has resulted in an item costing £1 in 1991 costing £1.84 in 2021. Your purchasing power has effectively almost halved. In short, looking for the best savings rate to earn an extra £3 a year is not the answer. The answer is a well-diversified portfolio of global equities. Over the long term, equities have always provided better returns than cash and inflation.”

However, the general view was one of caution, as higher inflation rates did not necessarily mean other changes – such as increased interest rates – would follow. Certainly not in the next few months.

Andrew Montlake is managing director of independent mortgage broker, Coreco. Montlake said: “Despite this dip, there is every chance inflationary pressure will continue to build over the coming weeks. Some believe that we may see Threadneedle Street raise rates before Christmas to help curb inflation, but I believe the Bank of England will hold its nerve, all the more so after the September dip. Confidence, though growing, is still fragile, so I think the Bank of England will hold off making any rash rate rises for some time yet.”

Conclusion

While inflation might have eased slightly this month, it is still at a high level and will continue to have an impact on business costs. But there are ways you can keep ahead of the storm, and ensure you’re fully up to date and knowledgeable about your company finances.

Want to keep a closer eye on your finances? Accounting software is a great way to help you with everything from inventory management to budgeting. Read our guide to the best accounting software options for small businesses to learn more.

Helena Young
Helena Young Senior Writer

Helena "Len" Young is from Yorkshire and joined Startups in 2021 from a background in B2B communications. She has also previously written for a popular fintech startup.

Included in her topics of interest and expertise are tax legislation, the levelling up agenda, and organisational software including CRM and project management systems. As well as this, she is a big fan of the films of Peter Jackson.

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