Inflation Data: Key Trends for SMEs

If you run an SME, you'll know that staying abreast of economic trends is often vital for success. The latest data from the Office for National Statistics (ONS) provides insights into key factors affecting SMEs, focusing on product and service price inflation. We sifted through the recent report to highlight the main headlines and trends that matter to businesses.

At a Glance

In December 2023, inflation inched up to 4% from November's 3.9%. Economists had expected a slight decline, but tobacco and alcohol prices contributed to the unexpected rise. To address the pace of price rises, the Bank of England raised interest rates to the current 15-year high of 5.25%. This increase led to higher mortgage rates but did increase returns for savers.

Sarah Coles, Head of Personal Finance at financial services firm Hargreaves Lansdown, told the BBC: “While the trend is likely to be downwards on interest rates, there are likely to be more knocks on the way, with conflict in the Red Sea raising the risk of supply shortages, which could feed into higher prices.

"There's the risk this could end up throwing a real spanner in the works. December's surprise rise in inflation demonstrates that the path is going to be bumpy".

Key Trends for SMEs

Marginal Growth for Producer Output Prices

Producer output prices rose by 0.1% in the year to December, a slight improvement from the 0.1% fall in the year to November. In the final month of the year alone, producer output prices decreased by 0.6%.

A rise in producer output prices means that companies that produce goods and services receive more money for what they produce. While this increase is an average that affects all businesses across the UK, it's hopefully a positive sign that some SMEs are making more from what they produce.

Producer Input Shows Signs of Stability

Producer input prices fell by 2.8% in the year to December 2023, the slightest change from a 2.7% fall in the year to November. Monthly, producer input prices experienced the biggest drop since June, declining by 1.2%.

Input and output price levels have remained relatively stable since June 2023 and are still substantially higher than their 2021 levels.

SMEs concerned about potential fluctuations can rest easy because there's no change to producer input prices. However, those hoping for positive change may find this news unsettling, but the producer input prices may change as the year progresses.

Insights into Output Producer Price Inflation

The annual inflation rate of producer output prices was 0.1% in December, showing little to no change from November. Legal and accounting services contributed the most in terms of upward movement.

Meanwhile, chemicals and petroleum products fell the most, a change that will undoubtedly impact numerous sectors throughout the UK. The decrease in petroleum prices could have the most considerable impact on SMEs as petroleum has one of the most significant influences on pricing throughout the British economy. Still, it's essential to be aware that prices won't suddenly start to fall immediately, especially with inflation climbing to 4%.

Input Producer Price Inflation Movement

The annual inflation rate of producer input prices was negative 2.8% in December, down from negative 2.7% in the previous month. Key contributors to the decline were chemicals and crude oil, falling by 8.5% and 10.2%, respectively.

As with petroleum, the decrease in the cost of crude oil could benefit SMEs as it's likely to bring down the cost of many other goods and services, but it's vital to remember that inflation has also risen to 4%.

Services Producer Prices on the Up

Services producer prices rose by 3.6% in the year to Quarter 4, showing a slight increase from 3.5% in the year to Q3. Professional, scientific and technical services contributed most to this inflation rate.

Exchange Rate Impacts Imports

Prices of materials and fuels imported by the British manufacturing sector fell by 1.5% between November and December. The fall in import prices is consistent with the increased value of the Pound, which increased by 0.9% in December 2023.

Decreasing import costs is great news for SMEs that rely on importing goods to run their business, and it could help them increase their bottom line in the face of the inflation increase.

Outlook for SMEs

While the latest data indicates overall stability, SMEs should continue to monitor input and output prices, especially when sectors like chemicals and crude oil have a bearing on their operations. Services sectors, particularly professional and technical services, are experiencing enjoying a period of growth. Keeping an eye on currency fluctuations and import prices will be crucial for SMEs in manufacturing.

In Conclusion

SMEs navigating the current economic landscape should continue taking advantage of the available data to help them make informed decisions. The stability in input and output prices, coupled with modest growth in services, paints a cautiously optimistic picture for small businesses.

However, it’s important to keep a watchful eye on external factors like fluctuations in the value of GBP and global market dynamics to remain resilient.

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Sam White