Inflation rises to 4% in December – How does this affect SMEs?

Inflation increased for the first time 10 months leading traders to scale back expectations of interest rate cuts

Inflation rises to 4% in December – How does this affect SMEs?

UK inflation has increased unexpectedly in December to a staggering 4%, up from 3.9% in November due to rises in tobacco and alcohol prices. The reading, revealed by the Office for National Statistics on Wednesday, has risen for the first time since February last year. The increase in inflation led traders to scale back expectations of how soon the Bank of England will start cutting interest rates. The Bank of England has previously raised rates in a bid to curb the pace of price increases in the UK, which has put a strain on households across the country. 

 “The data today will make the BoE’s Monetary Policy Committee more cautious,” said Tomasz Wieladek, chief European economist at investment company T Rowe Price. “We could see rate cuts at a pace of once per quarter rather than once per month.” Soaring food and energy bills helped drive inflation up, in addition to rising demand for oil and gas after Covid. The war in Ukraine meant less was available from Russia, putting further pressure on prices.

The conflict also pushed up global food prices due to a decrease in the amount of grain for sale. This effect was compounded in the UK by a shortage of vegetables, which took food inflation to a 45-year high. Alcohol prices in restaurants and pubs also rose. The current rate of inflation is nearly double the rate predicted by the Bank of England, with their target to keep inflation at 2%. But how is inflation affecting SMEs, and how are higher costs impacting the way organisations behave?

The traditional response to rising inflation is to put up interest rates, which makes borrowing more expensive. Businesses end up borrowing less due to rising interest rates, making them less likely to create new jobs. Some businesses may even choose to cut staff to curb the costs. When inflation increases, every aspect of a business becomes more expensive. Inflation impacts businesses from a supply side, as the costs of materials and products increase, and it may influence costs associated with trade. The demand side is impacted too as employees might seek higher wages, and these can result in companies driving up the costs of products and services. Cost increases might force businesses to forgo any large expenditures or think twice about expanding.

Some business leaders have warned of the implication of rising costs on businesses, such as hikes in broadband contracts. Nonetheless, it’s important to support your staff and their well-being, as they are also facing the pressure of rising costs with the extra burden placed on households, Greg Marsh, money-saving expert and CEO and co-founder at Nous said on Wednesday. 

“Today’s inflation figures are troubling for businesses,” he explained. “Crucially core inflation – the measure that really worries the Bank of England – is unchanged, putting pressure on to keep interest rates high. The cost-of-living crisis isn’t over yet. Businesses need to be aware that mobile and broadband providers will use today’s news to set mid-contract price hikes, which they sneak into contracts. This can impact your business contracts, of course, but also your employees’ lives. 

Our Nous analysis suggests that a typical household is more than £450 worse off over the last two years as a result of mid-contract price hikes for mobile and broadband customers. These changes to our bills feel relentless and never-ending after years of economic turmoil. So as a responsible employer, if there’s one thing you should do this year, it’s invest in your team’s financial wellbeing. Introducing support to make them better off and get money back into their pockets is essential for maintaining an engaged, productive and loyal workforce.”

Latifa Yedroudj
Latifa Yedroudj

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