Inflation hits 10-year high: What does it mean for UK businesses?

The annual rate of inflation across the UK, as measured by the Consumer Prices Index, surged to a 10-year high of 5.1% in November – up from the October figure of 4.2%.

The fastest annual rise in the cost of living since September 2011 was driven largely by the soaring prices of fuel and second-hand cars, energy, and clothing and footwear, according to the Office for National Statistics (ONS).

According to ONS, the Consumer Prices Index rose by 4.6% in the 12 months to November 2021.

ONS Chief Economist, Grant Fitzner, comments: “A wide range of price rises contributed to another steep rise in inflation, which now stands at its highest rate for over a decade.”

The ‘Nightmare before Christmas’?

Federation of Small Businesses (FSB) National Chairman Mike Cherry believes today’s impact will have a serious impact on SMEs – with less than two weeks to go before Christmas.

It’s not only Plan B restrictions that small firms in England are having to grapple with as we commence the 10-day countdown to December 25th.

Surging operating costs, labour shortages and supply chain disruption are adding to the nightmare before Christmas being experienced by millions of small business owners.

The imposition of Plan B means a new set of rules for small firms to get across, and a further hit to already suppressed consumer demand for festivities, in an environment where high prices are already eroding returns. Despite that fact, business support measures have not been adjusted to reflect new realities.

Many small businesses – especially those in the hospitality sector – which were thriving at the start of last year are now struggling to make ends meet because of a coalescing of factors beyond their control. This supposedly pro-enterprise government needs to step-up.

It should reinstate the covid sick pay rebate so smaller firms can recover the cost of supporting those who need to isolate and relaunch the workplace testing initiative – enabling test and release in scenarios where staff are pinged at work.

To directly assist firms with the spiralling costs of doing business, the current 66% business rates discount for hardest-hit firms should be increased to 100%. Coupling that adjustment with an increase in the targeted Employment Allowance to £5,000 would make a real difference. Policymakers also need to accelerate delivery of the £1.5bn business rates relief fund. It was launched many months ago, but is yet to pay out a penny.

Firms need greater clarity – both in terms of exactly what’s expected of them in relation to Plan B as well as transparency around what Plan C would look like – so they can plan ahead.

Small business confidence dropped every quarter this year, and we’ve lost 400,000 small businesses over the pandemic to date.

As we hurtle towards the introduction of import checks in January and a hike in the jobs tax that is national insurance contributions in April, the government needs to act now to prevent further long-term scarring of the small business community.

Soaring CPI inflation likely to make policymakers hot and bothered

Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown shares her thoughts on today’s inflation statistics.

Faced with such a high inflation reading, and with forecasts that the only way is up, the Bank of England would ordinarily be expected to call time on the cheap money party and raise interest rates. But with the recovery far from being in full swing and the omicron variant an unruly guest, set to knock back confidence further for many sectors, policymakers may be hot and bothered but are likely to stay in wait-and-see mode tomorrow.

With a possible Plan C on the cards, and closures of hospitality and retail being considered if hospital admissions soar, as well as a severe income squeeze taking hold, consumer sentiment and spending could take a fresh hit. What is pretty certain is that even if ultra-low rates stay put right now, with prices running so hot, there won’t be an extended lock-in with expectations that February is likely to see rates lift.

Prices don’t look so transitory right now and seem set to linger for much longer and the Federal Reserve seems much more inclined to bring the cheap money binge to an end. Focus will shift to the Fed’s decision on monetary policy later and with fresh indications that inflation is sizzling hot with producer prices reaching a record annual increase of 9.6% in November, there are expectations that last orders will be called on its mass bond buying programme much sooner, and that an interest rate rise could be brought forward next year.

The spread of Omicron is proving a headache to nurse in the US as well, along with ongoing supply chain pains, but with growth much more buoyant than in the UK, withdrawing support doesn’t appear to be quite so much of a dilemma.

Impact of Omicron Covid-19 variant and industry challenges

Shachar Bialick, CEO and founder of Curve, a financial super-app, comments on the latest ONS inflation figures and the impact of the Omicron Covid-19 variant.

Inflation is continuing to surge even after last month’s 10-year high. UK inflation is remarkably high, well above the government’s 2% target, and high inflation pushes up prices which reduces people’s purchasing power in real terms. Inflation expectations for the year ahead have also jumped to 3.2%, up from 2.7% in August. There is potential for Omicron to keep high inflation for longer, squeezing household incomes at an already challenging time.

Rachel Winter, Associate Investment Director at Killik & Co, adds her thoughts.

For some, this sharp rise in inflation will be as chilling as the winter weather, as soaring prices continue to squeeze household budgets amid ongoing pandemic disruption.

A key driver of rising inflation can be seen in ongoing supply chain issues, which have resulted in a global energy shortage. High fuel costs were a key contributor towards November’s inflation reading. Additionally, now that the Omicron variant has entered the picture, things are looking bleaker for Q1 of next year, as the virus will have a significant impact on economic growth if our new restrictions remain in place, and even more so if another national lockdown occurs.

Although the Bank of England is not expected to raise interest rates this week, today’s inflation figures should certainly add to the case for doing so. Even when rates do start to rise, they are likely to do so slowly, and therefore savers will continue to see the value of their cash erode in the face of inflation. Long-terms savers may wish to consider investing in order to improve their returns.

What does the future hold for SMEs?

Commenting on rising inflation and a tough year ahead for SMEs, Andrew Aldridge, Partner at Deepbridge Capital, believes more government support is needed.

As expected, inflation continues to rise gradually with expectations being that it will likely peak around the 5% mark. This further supports our belief that 2022 will be a difficult year for many SMEs across the country who will struggle to fund working capital needs due to the reduced value of their dry powder. It remains critically important that scale-up businesses, particularly in high-growth sectors such as digital technologies and life sciences are supported, as they will play a vital role in driving economic growth in the post-pandemic world.

Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios. With our EIS funds reaching record levels of funding in 2020/21 it is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies which we believe will be at the forefront of our economic recovery.

Rate rise debate reignited as inflation surges

Personal finance expert Adrian Lowery of investing platform Bestinvest believes that today’s announcement will have a far-reaching impact.

British households already know the average cost of living is rising sharply: they are seeing it in their rising bills and overall monthly spend.

But inflation isn’t the same for everyone and families who are more reliant on their cars and who spend a higher proportion of their income on household bills will feel the crunch more keenly.

This inflation reading – higher than expectations and more than twice the Bank of England’s target – will reignite the debate over whether interest rates need to go up, not least on the Bank’s monetary policy committee, which makes its next decision tomorrow.

The unexpectedly rapid spread of the Omicron variant, and fears of an economic relapse, have made a hike less likely – but this surge in price pressures could bring out a couple of the inflation hawks on the MPC to vote for a small rate rise.

Either way real interest rates for savers will remain resoundingly negative for the foreseeable future. Investors are also seeing their returns eroded at the moment but equities and other investments provide the only reasonable expectation of maintaining the real value of one’s savings.

US inflation came in at an eye-watering 6.8% in November (the highest since June 1982) and if central banks around the world start to tighten monetary policy suddenly in response to overheating prices, with economies not clearly out of the woods, the markets could hit some turbulence.

But long-term investors with diversified portfolios should not be overly concerned with short-term stock market volatility. New investors who have properly assessed the risks can buy into the market at regular intervals to lessen the effects of market turbulence.