Hot air balloon - Inflation

The cost of living is on everyone’s lips.

No matter where you turn; the radio, television, social media, or newspapers, the message is clear. 

Costs are going up and budgets are being squeezed.

For the most part, the focus is on the individual person or family. What is commonly overlooked is the effect on UK businesses. 

This blog will focus on how businesses in the UK cope with inflation.

The usual basket of goods for families is prepared by the ONS (Office of National Statistics).

The top-4 basket categories are: Housing, recreation, transport, food and soft drinks.

These four sectors represent 63.6% of the entire Consumer Price Index (CPI). And yet they do not represent the different challenges that businesses face during a period of high inflation and rising interest rates.

The Bank of England are forecasting inflation to rise to 10%.

As a direct result, interest rates rose to 0.75% in the UK on the 17th March. This is the first time the Bank has raised rates at three successive meetings in more than twenty years.

The Fed have also increased interest rates in the USA.

The effect on businesses

In November 2021 the British Chambers of Commerce said 80% of U.K. businesses are feeling the effects of higher prices. And this was before the Russia/Ukraine crisis.

This is as well as a shortage of goods and workers, a finding which adds to concerns about inflation. 

The lobby group said its survey showed 80% of companies saw an increase in their prices in the past year. 

And half of the companies said those gains were significant.

As businesses large and small emerge from the pandemic, they face the unexpected double whammy challenge of inflation increases and rising interest rates. 

The key to this is how much of the extra cost to businesses can be passed on to customers.

Unlike individuals and families, businesses face different inflation issues

  • The cost of raw materials
  • The costs of haulage
  • Rising salary costs of their employees
  • The increase to National Insurance
  • The cost of debt when interest rates rise on company borrowing
  • Significant energy bills for offices, factories, and warehouses
  • A shortage of qualified staff
  • Pressure on profit margins and viability

Major brand names such as Next, Marks & Spencer, Persimmon, Greggs, and Sainsbury’s have warned about operating cost inflation.

Some business sectors face their own unique challenges. Take Financial Services as an example.

In November 2021 the FCA regulatory body (Financial Conduct Authority) announced that fees for smaller firms would nearly double.

Clients of regulated firms are protected by the FSCS (Financial Services Compensation Scheme). 

The £833m FSCS levy for 2021/22 represents an increase of £133m compared to the 2020/21 levy (£700m). This is a rise of 19% which needs to be accounted for in company budgets. 

A third unavoidable cost relates to Professional Indemnity insurance.

According to the Insurance Post in 2021 some IFA firms have faced up to a tenfold increase in professional indemnity insurance rates, reductions in cover and increases in excesses in the last three years. Increased costs at these levels could become unsustainable without increasing prices. Otherwise, firms would fail. This is the challenge businesses face. The cost of delivering a professional and sustainable client service will undoubtedly mean that the cost of the service they deliver will need to rise.

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