Inflation unchanged but questions remain over UK interest rate

The UK inflation rate was unchanged in September, remaining at 6.7%, according to the latest figures from the Office for National Statistics.

Food and non-alcoholic drink prices dropped for the first time since time September 2021, falling 0.2% compared to August’s inflation figures. However, food prices and drink prices remain significantly higher than a year ago, with the average food shop costing 12% more than this time last year. The prices for furniture and household goods also rose by less than a year ago.

These factors helped to offset soaring fuel costs, which was the biggest upward contributor to the annual inflation rate.

The Guardian reports that city economists were expecting a slight fall in inflation in September to 6.6%, which raises questions over the Bank of England’s next decision on interest rates. This is due to take place in November.

What does this mean for the UK’s SMEs?

Business leaders from across the UK commented on what September’s inflation figures mean for the UK’s SMEs:

Neil Rudge, Head of Enterprise at Shawbrook, comments: “For business owners this is an encouraging sign, especially as in our recent research inflation and the rising cost of living were cited as the biggest concern (70%) for SMEs over the next twelve months.

“Yesterday’s news that wages rates are simultaneously increasing does mean that labour costs for SMEs are on the up. However, since inflation is steadying, the increase might be less than what it would be in a higher inflation environment. This could lead to improved profit margins for SMEs as they can adjust their prices more easily, without facing rapidly rising costs.

“With growth on the agenda for many SMEs over the next twelve months, many will feel more confident to start these plans in earnest. Whatever their plans, finance will be a key component and lower inflation and higher wage rates can create a more stable economic environment. This stability could make it easier for SMEs to access financing, as lenders and investors may have more confidence in the business climate.

“While it’s still a challenging environment and prices are still increasing by 6.7%, a declining inflation environment does reduce the risk of rapidly eroding the value of borrowed funds, making it less expensive for SMEs to finance their operations or expansion.”

Mike Randall, CEO of Simply Asset Finance, says: “Reports of steady inflation in September will provide a stable foundation for SMEs who are hoping for a smoother path to fuel their pursuit of growth in the coming year.

“With a lower inflationary environment on the horizon, small businesses may feel more comfortable seizing growth opportunities which may have otherwise been deemed too high risk. Now is the time to continue embracing alternative avenues in diversifying product lines and investing in technology to streamline processes

“However, as specialist lenders, we are not simply fair-weather friends to SMEs. Now more than ever must we continue to underpin SME growth with flexible financing solutions and industry expertise, and support SMEs whatever the weather.”

John Glencross, CEO and Co-Founder of Calculus, comments: “Though inflation remains the same today, the report of wages outpacing inflation for the first time in two years is a positive development for both consumers and businesses. The trajectory of recent economic data, on the whole, offers some reassuring signs following a period of economic sluggishness.

“Nevertheless, there is an awareness that a technical recession remains a possibility. With forthcoming political uncertainties, it is reassuring to see cross-party support for incentives to drive funding to small innovative UK businesses.

“The Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) remain crucial pillars of support for UK business, fostering growth and championing innovative enterprises. Calculus, which pioneered the first approved EIS fund 24 years ago, remains unwavering in its commitment to supporting UK SMEs.”

Chieu Cao, CEO of Mintago, said: “This morning’s data has delivered a nasty shock. While the overall rate of price increases may not have technically risen, certain essential expenses continue to soar, and we cannot forget the real people behind the data – the Britons living paycheck to paycheck and struggling to make ends meet.

“The workplace is not immune to the ripple effects that inflation will be creating, so employers must remain vigilant and attuned to the financial stresses their employees will be facing. After all, a failure to recognise and support employees who are struggling comes at the risk of placing their mental health in jeopardy – not to mention the productivity and ultimate success of the business.

“Offering financial wellbeing programmes and providing resources for budgeting or financial planning, therefore, should continue to be a priority for businesses and HR managers even if broader economic indicators suggest the situation is improving. Only then can employers foster an environment that makes a tangible difference to the financial wellbeing of their staff.”

Jonathan Andrew, CEO at Bibby Financial Services, comments: “Today’s stagnant inflation rate is bad news for UK businesses, especially as our recent research saw 59% of SME owners continue to cite inflation as a key challenge.

“With inflation remaining around three times higher than target, businesses are having to contend with rising fuel costs, skills shortages and persistently high interest rates as they try to stay afloat. If this wasn’t enough, financing is becoming more expensive and harder to access for many smaller businesses at a time when external support is crucial to their survival.

“SME owners and decision makers say they want greater tax incentives, less red tape and access to low-interest loans or grants and we must see measures that address these challenges in the Autumn Statement next month. Without further support, we’ll likely see many more small businesses being pushed over the edge over the coming months.”

Will interest rates rise in November?

Julian Jessop, Economics Fellow at the Institute of Economic Affairs, said: “Despite the disappointing inflation data for September, the Bank of England should now be thinking about cutting interest rates, not raising them again.

“The bigger than expected fall back in August means that inflation is still lower than the Bank had been forecasting. Economic growth has been weaker too.

“A large drop is baked in for October. The reduction in the Ofgem cap on domestic energy bills will knock more than one percentage point off the headline rate this month. Above all, money and credit are now both shrinking, adding to the risks of recession and ensuring that inflation has a lot further to fall.”

Nicholas Hyett, Investment Analyst at Wealth Club, comments: “September’s inflation numbers present a messy picture. At the headline level, CPI is flat month-on-month, but under the surface there’s a lot of moving parts. Food prices have fallen while more domestically exposed sectors like restaurants and hotels have seen prices rise. Higher prices for motor fuel are also having an effect.

“That makes it a difficult set of numbers to interpret – especially for interest rate setters at the Bank of England. Had inflation continued to fall, as many had expected, then there would be a strong case for rates to stay where they are, slowly squeezing inflation out of the economy. However, if inflation remains stuck at its current stubbornly high level, that’s a whole different kettle of fish.

“No-one wants inflation to remain stuck where it is for an extended period. If the Bank think’s that’s a danger, they may well feel their only option is to set rates on an upwards trajectory once again.”