Inflation reports are difficult to avoid in the current economic climate, and millions of businesses are concerned about what it may mean.
Today, SAS Accounting explains the basics behind inflation, the likely impacts on commerce, and how you can prepare for the months ahead!
What Is Inflation?
In short, inflation means that prices rise over a sustained period.
The Consumer Prices Index monitors the costs of everyday items, so if inflation is at 2%, it means that, on average, products and things like fuel have increased by £0.02 for every £1.
Inflation causes concern because where prices are rising, the purchasing power of currency drops - you might have been able to buy ten items for £100 last year, but your same £100 now will cover the cost of nine.
High inflation rates usually mean that, unless wages increase at the same pace, people have lower expendable income, which in turn means a drop in consumer spending and lower business sales.
If you've read any newspaper in the last month, you'll have heard about various strikes and pay disputes, which all tie back to increased living costs and the demand for salary increases to match.
How Does Inflation Impact Businesses?
As we've touched on, the normal outcome of inflation is that people spend less, primarily on expendable items such as holidays, entertainment and dining out.
However, the British economy is in a very unusual place because spending habits seem to be bucking the trend and don't align with the classic outcomes of inflation!
Spending on travel, for example, is still very high, which is thought to be a result of the pandemic and built-up demand for services that were unavailable for much of the past two years.
This unique situation led to unexpected GDP growth of 0.5% in May 2022, a somewhat different picture from the forecast zero growth, as reported by The Guardian.
Therefore, the effects of inflation may impact businesses very differently, depending on their sector and other circumstances:
- Companies with fixed-interest debts will benefit since the real value of the debt will drop.
- Exports cost less than for foreign competitors due to a decrease in the value of the local currency.
- Staff may expect wage increases to ensure they have the same level of take-home pay and can cover higher living costs.
- Putting prices up to maintain margins can be challenging, but UK businesses may need to charge more for their products or services.
- In some industries, customer demand may fall as the pressure of energy, fuel and grocery prices deter people from spending on non-essentials.
The key to proactively managing the impact of inflation is to look carefully at your business, adjust your budgets accordingly, and recognise where the biggest effects (positive or negative) are likely to be felt.
Advice for Businesses Concerned About Inflation
We recommend that every company undergo some housekeeping exercises to ensure they recognise where they might need to adjust their plans.
- Spending visibility is important, so you can assess where your outgoings have increased, by how much, and how serious that is for your bottom line.
- Differentiating between strategic spending and other costs allows you to decide which activities are essential and which you can cut back on.
- In some cases, you may be able to reduce spending by focusing on core products or services and streamlining your business over the next few months to keep your budgets tightly controlled.
With soaring utility prices, almost every UK business will have seen its operating costs climb. Getting a firm handle on the exact figures and making data-based decisions will help you determine the right way forward.
How Long Is UK Inflation Expected to Keep Rising?
The good news is that, while the economy will take time to recover, inflation isn't expected to last forever.
Last month, an updated statement from the Bank of England predicted that inflation would slow in 2023 and return to the target of 2% within the next two years.
Other economists expect inflation to peak this autumn and begin reducing, although nobody can be certain how things will play out.
In the meantime, the best option is to revisit cash flow forecasts, review up-to-date trading figures, and make informed decisions to ensure your business is not severely impacted.
If you would like any support or guidance dealing with cost pressures or restructuring your finances during this inflationary period, please contact the SAS Accounting team at your convenience.