UK Inflation Stays at 8.7%

Despite hopes that it would decrease, the BBC reports that UK inflation remains unchanged at 8.7%. This news further cements speculation that interest rates will rise, but how will this impact UK businesses? In this article, we cover the recent history of UK inflation, how your business could be affected and what you can do about it.

What is Inflation?

Inflation is the rate at which prices for goods and services are rising. Because inflation is the increase in the price of goods and services, you can buy less with the same amount of money compared to how much you could purchase previously. Subsequently, inflation can significantly impact your business.

What is the Consumer Prices Index?

In the UK, the Consumer Prices Index (CPI), which includes goods and services purchased by households, is commonly used to measure inflation. You can also exclude food and energy prices from the CPI through what is known as CPI excluding food and energy (CPIE). The Consumer Price Index including owner occupiers' housing costs (CPIH) is also used to track inflation.

What's the Difference Between Inflation and Core Inflation?

There's a reason that inflation and core inflation rates sometimes differ wildly. Inflation covers the increasing cost of goods and services, whereas core inflation, like the CPIE, excludes volatile items like food and energy prices. This differentiation helps provide a clearer picture of underlying inflation trends.

UK Inflation History

Inflation has been rising steadily since the start of 2022. The CPI has increased every month since January 2022, when it was 1.5%. In April 2023, the CPI climbed to the highest inflation rate in the UK since 1982, reaching 8.7%.

Although the UK and the rest of the world are still recovering from the global pandemic, recent events have resulted in the UK inflation rate getting to where it is. Factors such as the war in Ukraine, supply chain disruptions and rising energy prices have all contributed to inflation increases.

As we recently covered, the Bank of England (BoE) raised interest rates in an attempt to bring inflation under control. In December 2021, the base rate rose from 0.%1 to 0.25% and continued to climb to its current high of 4.5% (correct as of 21st June 2023).

According to the Office for National Statistics, the CPI has increased over the past few months as follows:

How can Inflation Affect UK Businesses?

While the effects of rising inflation rates on households are apparent, businesses are also affected. However, the effects on business are sometimes positive for businesses.

The Positive Effects

• Increased profits: If your costs rise slower than your prices, you can improve your profits by charging more for your products or services.

• Increased demand: If your business offers low-cost products and services, inflation may benefit you. This is because inflation reduces consumer purchasing power, increasing demand for lower-cost products or services.

The Negative Effects

• Increased operating costs: Because your business may have to pay more for essentials such as wages, inventory and running costs such as Business Energy, inflation can increase your operating costs.

• Reduced demand: Converse to the positives, high inflation rates can decrease the demand for products and services as consumer purchasing power decreases.

• Increased uncertainty: One of the most significant issues of increased inflation is the uncertainty it presents for businesses. This is due to fluctuating costs and prices, making it difficult to plan for the future.

How to Address the Negative Side of Inflation

There are many things your business can do to mitigate the effects of inflation, including the following:

Pass on Higher Costs

While this is an unfortunate side effect of inflation, if your business faces increasing costs due to inflation, you may have to pass these on to your customers by raising your prices. One negative of this action is you may suppress demand for your products or services, but if you increase your prices gradually, you'll give your customers time to adjust to this change.

Negotiate Lower Prices with Suppliers

Although your suppliers will also feel the effects of inflation, it can be beneficial to negotiate lower prices. Put simply, you can offset the cost increases challenging your business if your suppliers agree to lower their prices.

Reduce your Costs

There are many ways your business can reduce costs. From simply being more efficient or reducing your energy consumption to ensuring you're getting the best deal on essentials such as Business Broadband and Energy, reducing your costs will make it easier to deal with inflation increases.

Is UK Inflation Staying Unchanged an Issue?

UK inflation staying the same isn't intrinsically a negative issue for your business. Even if it does negatively impact your business, as we've covered in this article, there are many things you can do to mitigate the challenges. If you want to reduce costs or need a financing solution to help you grow, we're here to help you find the ideal solution for your business.

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Jon Cole-Dalton