The rise of inflation and interest rates- What this means for businesses

Inflation and interest rates have been major topics in the news recently. Inflation is surging in the UK as well as in other parts of the western world, mainly down to the ongoing COVID pandemic.  In November, the cost of living in the UK hit a 10 year high of 4.2% which was more than many had anticipated. In fact, the figure is now more than double the target set by the Bank of England.

As a result of the rise in inflation, the Bank of England has recently (19^th Dec) raised interest rates. This is significant as it is the first time that this has happened in more than three years. This is still aimed at tackling the ever-increasing price rises. However, for many economists this decision was still a surprise due to the uncertainty of the Omicron variant, believing it could slow the economy by causing people to lower their spending.

Inflation is now at 5.1% which is the highest on record in a decade. This figure is only expected to rise in the upcoming months. Bank governor Andrew Bailey said to the BBC that “in the short term- that is, in the next two or three months- we think it can get to around 6%.

This is worrying news for many businesses. Official data from the Office for National Statistics show that the main pressure which is causing this rise has come from rising utility costs. Electricity is up 18.8% and gas by a staggering 28.1% due to a global rise in energy prices.

With the combination of increased costs, pressure to raise wages and tax rises in April, this is a tough time for many businesses. However, a report from the Bank of England forecasts that the inflation rate will hopefully drop back down closer to the target of 2% towards the end of the year.

Many firms are now taking steps to try and reduce the impact of the rising prices. This is through buying supplies in bulk, focusing on core product lines, and trying to cut their own operating costs to compensate.

Interest rates have now risen to 0.25%, up from 0.1% – the first time in three years. With potentially more increase to come, it is important that the impact on businesses is understood.

Debt will become more expensive, and businesses may consider using cash reserves to reduce this or arranging a fixed interest rate. A cashflow forecast may be useful to see the impact of increased funding costs alongside other cost rises. Rising interest rates may also further dampen demand as individuals, as well as businesses, may opt to save during this time as opposed to spending. This can lead to a drop in demand which businesses will need to make note of when they are doing their planning and forecasting for the upcoming year. This reduction in spending is likely to lower economic growth as a whole, with the hope that inflation will follow and come down too.

If you need any more information about how the recent increases in both inflation and interest rates can impact your business and how you can plan for these changes, please get in touch with a member of the Wright Vigar Team.