How will businesses cope as UK inflation hits 40-year high of 9%?

This morning the Office for National Statistics (ONS) published its latest Consumer Prices Index, which saw inflation jump to 9% in the 12 months to April, up from 7% in March. This means prices are rising at their fastest rate for 40 years.

The main contributor to the surge in inflation was the £700-a-year rise in energy costs last month: according to the ONS around three-quarters of the rise in inflation in April came from higher electricity and gas bills.

However, higher fuel and food prices, which are being affected by the conflict in Ukraine, are also causing living costs.

To make matters worse, inflation is expected to continue rising this year, with analysts predicting it will reach even higher levels in October.

“SME owners are at breaking point. One in six believe they will never financially recover”

Alan Thomas, UK CEO at Simply Business, one of the UK’s largest providers of small business insurance, comments on the latest ONS inflation figures: “Small business owners are at breaking point – feeling the crippling pressure of rising costs, energy and fuel prices. With inflation at a 40-year peak, SME owners, particularly sole traders and micro-businesses, will feel the pressure of paying more for products and materials. At the same time, consumer purchasing power is going down, meaning SME owners could be hit with a decrease in revenue.

“High inflation is squeezing small business owners while many are still in a crucial recovery period. The eye-watering cost of Covid-19 for SME owners, including lost work, earnings and loan repayments, now sits at a total of £109.6 billion according to one of our recent surveys. One in six also believe they will never recover financially from the pandemic. As a result, two in five (46%) SMEs are calling for long-lasting financial support from the government to help them get back on their feet after Covid-19.

“Accounting for over 99% of all UK businesses and contributing trillions of pounds in turnover every year, small businesses sit at the heart of our communities and are vital to our economy. Ultimately, we need to hear more from the government on its plans to support and act for the sake of UK small businesses. Put simply, if the UK is to recover from the effects of the pandemic, and to avoid the recession the country is heading for, we need small businesses to bounce back.”

How will businesses cope with rising inflation?

Chirag Shah, CEO and Founder of Nucleus Commercial Finance, says businesses will need to be clever to navigate rising inflation. He comments: “Prices took another leap upwards in April, heightening worries about the cost-of-living crisis. Worryingly, price rises show few signs of abating. With continued reports of manufacturers having to hike prices to counter global supply issues, the real challenge is how businesses manage balancing escalating overheads with the risk of driving away much-needed customers.

“Businesses will need to box clever, especially as they come under increasing pressure to help their own employees navigate a situation in which their take-home pay is being eroded at pace. This may well include avoiding stoking the wage spiral by offering different workplace incentives, such as bonuses, to attract and retain staff. But none of this is cost-free.

“SME business owners need to take stock of their financial positions now and identify accessible finance options should they be required. It’s going to be a bumpy few months ahead, but identifying a clear plan now will help them successfully navigate out the other side.”

However, Douglas Grant, Group CEO at Manx Financial Group PLC, says the Government should introduce a permanent loan scheme for SMEs. He comments: “Today’s announcement should come as a major wakeup call to just how significant the rise in inflation will be but also just how difficult the remaining half of the year is going to be.

“We believe that demand for working capital, which has already reached unprecedented levels, will soar even further as more businesses desperately require liquidity provisions to counteract rising interest rates, supply chain issues, increases in wages and additional pandemic-induced headwinds. With the cost of borrowing set to increase, many SMEs are struggling and will continue to be challenged this year.

“Having successfully deployed multiple relief schemes – BBLS, CBILS and RLS – for SMEs throughout the pandemic, the UK government should, in our opinion, now turn their attention towards a permanent loan scheme to help leverage businesses going forward. Now is a vital time for the Government to work together with traditional and alternative lenders to guarantee the future of our SMEs and to ensure the successes of these emergency schemes are not wasted.

“As we look towards the post-pandemic era, many SMEs are at a critical tipping point, some between failing and surviving, others between surviving and thriving. As the government looks for ways to power the economy’s resurgence, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies, and in turn, our economy.

“SMEs would be well-advised to take stock of their current capital structure and if appropriate, access fixed term, fixed-rate loans to prevent additional exposure to an increasingly volatile lending market.”

Donald Boyd is Head of Growth at Azets, the regional accountancy firm and business advisor to SMEs, and he urges businesses to be brave. He said: “My message to businesses is to be brave and have upfront conversations with customers to increase prices to absorb rising costs – in the short to medium term we are finding anecdotally that margins are holding up.

“With businesses dealing with business-to-business (B2B), there are customers accepting of price increases in the main as they, in turn, are passing the increases on. However, any price rise is far less forgiving in the business-to-consumer sector, where retail and hospitality, in particular, will be first impacted with reduced discretionary spending by squeezed families.

“We may also see a dash for value as households understandably eschew higher-value goods for strong value propositions. Whilst it is of little comfort to SMEs and the public, much of the inflationary pressures are resulting from higher household energy prices and fuel costs rather than anything fundamentally unsound in the economy. It may be a case of holding our nerve until inflation peaks at around 10% or above before starting to fall next year.

“We also know that many companies pared back to the bone during the pandemic, which subsequently translated into record efficiencies, meaning there may be leeway to retain current pricing without compromising profits as there is a cushion which wasn’t there before.

“Whilst inflation is clearly a pressing issue, the main issue for businesses is the labour market and the lack of skilled workers is clipping wings of the expansion plans of many companies because they cannot scale up without comprising quality. In some ways, this is more of a danger to growth than inflation.”

“Those that bury their heads in the sand are going to be the hardest hit”

James de Sausmarez, Director and Head of Investment Trusts at Janus Henderson, provides a stern warning. He comments: “High inflation burns through all the cash savers have built up, and with prices continuing to rise at pace, those that bury their heads in the sand are going to be the hardest hit.

“British people are quite simply neglecting their futures by leaving such vast amounts languishing in cash. People saving for the long term, for example for retirement, must look to asset classes that can protect their savings from inflation and provide real growth too.

“The UK’s households are sitting on cash savings worth a year and a half of the nation’s entire annual spending. This is very worrying. If they simply kept a prudent three months’ income on deposit to cover contingencies, savers could release up to £1.5 trillion and opt for investments, like investment trusts, that have historically delivered far superior returns.

“Investment trusts can offer not only a superior income compared to cash, but they have also delivered capital gains too. Crucially, shares have an important element of built-in protection against inflation because many companies are able to increase prices and protect their profits when the cost of living is rising, and this flows through to the dividends they pay shareholders. Cash, by contrast, sees its true value gradually evaporate when inflation is so much higher than interest rates.

“Share prices fall as well as rise, especially in uncertain times like today, so investors have to be prepared to take some risk and hold their shares for the medium to long term. But if stock markets sometimes have a bad year, most companies still pay dividends to their shareholders. Yet even after you add interest income to the total, cash has lost value every year for 12 years in a row.”

Rachel Winter, Partner at Killik & Co, believes investing can help consumers save during this time. She comments: “UK inflation has hit 9%, surging ahead of last month’s 30-year high of 7%. These are the first figures to include the huge jump in the consumer energy price cap, and they put the spotlight on the government to draw up a long-term plan to tackle the cost-of-living crisis.

“Many households are struggling to stay afloat as they face the biggest squeeze on consumer finances since the 1970s. With the economic outlook increasingly gloomy, the prospect of a recession is becoming more real. Arguably, the stock market has already priced in this risk.

“While we navigate a volatile market, it’s important to inflation-proof our savings. Investing is one way to accomplish this. Consumers should look to products such as stocks and shares ISAs to give them a better chance of achieving above-inflation returns.”