Inflation, in itself, is not a bad thing. Prices need to rise over time to encourage spending. There is an ideal rate of inflation of around 2%, but throughout 2021 and 2022 to date, inflation has risen well beyond this healthy marker.
Consumers are feeling the pinch in their pockets as the price of everything from energy to a pub lunch reaches higher and higher levels. However, small business owners are also dealing with the pressures of rising inflation, increasing the demand, among some, for business loans. So what do you need to know, as a business owner, as prices continue to rise? Here’s our simple guide to inflation and what it means to small business owners in the UK.
Why are inflation rates so high?
The rate of inflation has risen for a number of reasons. High inflation rates were expected as the pandemic and lockdowns came to an end. Consumers have been waiting to get out and spend their cash again. The demand for hospitality, travel, food, drink, clothes and other consumables has soared as people have regained their freedom. This has had an inevitable impact on inflation.
However, some other factors were a little less expected and have driven inflation rates to extremely high levels. These include the price of imported goods, partly as a result of Brexit and partly thanks to factors like staff shortages and production delays. Then there’s the war in Ukraine, which has led to further increases in energy prices.
The Bank of England expects the rate of inflation to reach its highest levels in 2022, before falling back to more normal levels over the coming few years. “We expect inflation to be around our 2% target in two or three years’ time,” the Bank of England explained.
It explains that the events and factors that have led to this current increase in inflation are not expected to be long-term or, indeed, permanent. These are temporary issues and the demand for goods, as well as the availability of goods, should settle down and inflation should normalise.
How is high inflation impacting small businesses?
Setting your prices is one of the most challenging aspects of running a business through a period of economic uncertainty. Many business owners will be putting their prices up, as demand increases and costs rise. However, if you put prices up too high, demand could start to fall or you could lose customers to your competitors who are charging lower prices.
In addition, the inflation issue is ever-changing and it’s difficult to predict how high inflation will get this year. To avoid increasing prices again, setting the right prices the first time is important.
Whatever line of business you are in, your costs are likely to have risen in the past 12 months. If you are a manufacturer, raw materials might be your main concern. Hospitality businesses might find that energy costs and salary hikes are a major burden, for example.
The increasing price of energy, particularly since the energy price cap increased by several hundreds of pounds in April 2022, has had a serious impact on most businesses’ bottom lines. We can feel these pressures in our household budgets, but also in our business accounts, and right now, there’s no sign of these cost pressures easing.
Pressure on salaries
As the cost of living crisis hits your staff’s pockets harder and harder each month, they will, inevitably, start to turn to their salary for a solution. When inflation is very high, employees are getting less and less well-off all the time. It’s not a surprise that they ask for high wages to offset the rising prices a little.
As an employer, you will feel the pressure to help your employees out with higher wages, but will not always be in a situation where you can afford to do so. These scenarios can be horribly stressful for business owners who often find their hands tied. Seeking out business finance can enable you to meet your employees’ salary expectations.
What can you do, as a business owner, to limit the impact of high inflation rates?
It’s a challenging time to run a small business in the UK, but there are steps you can take to limit the impact of the unusually high inflation rates we are all experiencing right now.
Hang in there
Remember, the high prices we are experiencing right now and the rising inflation rates, will not last forever. Even if high prices start to persist over a longer period, the Bank of England can increase interest rates to help bring down inflation.
Making major operational or strategic changes in response to the latest cost increases may, in some cases, be short-sighted. If you increase prices, will you risk deterring your existing customers? Can you afford to weather the storm without increasing prices, in light of the predictions that the inflation rate will stabilise again? Could a business loan help you to meet short-term cost rises without making any fundamental changes to your own prices?
High inflation rates are partly caused by an increase in demand, which can be a real positive for businesses. Again, getting the right business finance can help you to ensure you are making the most of this period of high demand, which can, in itself, help you to meet rising costs.
Limit your exposure wherever possible
There are straightforward ways to limit your exposure to higher costs, such as by becoming more energy-efficient, changing suppliers, looking for cheaper raw materials and limiting travel. But it’s wise to avoid making permanent changes without thinking through the more long-term repercussions.
Consider business finance
A business loan can help small businesses to weather the current storm and continue to pay their suppliers and their staff. It’s certainly a worrying and challenging time for many small business owners who are struggling to keep their heads above water as prices rise further and further. However, there’s no single cause of the inflation rise and it’s partly down to booming demand following the pandemic.
With this in mind, avoid making any rash decisions when it comes to your business’s day-to-day operations and hang on in there. Business finance can help you to do just this and flexible loans can enable you to cover costs now and repay when the pressure on your wallet has eased.