Inflation – what is it and how can it affect my business?

January 24, 2022

24 January 2022:  Inflation is the rate at which prices are rising.  As of December 2021, the rate of inflation in the UK had risen to 5.4% – according to the Bank of England this was expected to peak at 5% but not until April of 2022.  The rate of increase is the highest since March 1992 and the main reason for this is due to the rising price of energy.  This has meant higher energy and transport bills for businesses, many of whom pass on the extra costs to customers.  In addition, supply problems and higher shipping costs also continue to impact on businesses.

In 2021, up to November, regular pay, excluding bonuses and adjusted for inflation, fell 1% meaning that wages are failing to keep up with cost of living.  A number of other developments are expected to hit the UK this year, putting further pressures on finances, such as:-

  • Regulated rail fares in England will rise by 3.8% in March
  • In April, companies, workers and the self-employed will start paying an additional 1.25% in National Insurance Contributions under the Health and Social Care Levy
  • The same month is likely to see substantial rises in gas and electricity bills as a result of the energy price cap increasing in the region of 50%

The Bank of England’s traditional response to rising inflation is to raise interest rates.  That means anyone who has borrowed money could see their monthly payments go up, especially on mortgages tied to the Bank of England’s rates.  The idea is that when borrowing is more expensive, people will have less money to spend.  As a result, they will buy fewer things, and prices will stabilise in response.  But if inflation is caused by external forces, such as the global energy prices, then this might not be the answer.

There are a lot of ways business can suffer as a result of inflation increases.  Inflation can disrupt business plans as it increases costs and reduces profit margins causing businesses to charge customers more and potentially struggle to pay existing outstanding invoices for suppliers.  It can directly affect the profit margins of small businesses and so it is important that businesses review and monitor their cash flow and have structures / plans in place in order to adapt to increases.  Businesses that trade overseas can also be impacted by the increase for example, if inflation is higher in the UK than it is elsewhere, then the UK’s goods become comparatively more expensive leading to a fall in the demand for the UK’s goods.

If you feel you may need to speak to one of BRI’s experienced management team for advice in respect of potential issues you are facing in your business, please do not hesitate to get in touch.