What do the latest inflation figures mean for UK businesses?

Following the release of the Office for National Statistics (ONS) inflation figures which show that the Consumer Prices Index (CPI) rose by 3.1% in the 12 months to September 2021, down from 3.2% in August, Business Leader spoke to some industry experts to see how it will truly impact British businesses. 

Inflation has slowed – is it a trend or a blip?

Ian Warwick, Managing Partner at Deepbridge Capital, shares his thoughts on the CPI announcement.

While inflation in the short term appears to have slowed, the year-on-year data shows that the UK CPI has maintained a significant milestone in high inflation and it won’t be long before it rises again.

With rhetoric of potential interest rate hikes also increasing over the last month it raises the question of exactly how long the Bank can hold rates at current levels before it is forced to step in. Many early-stage businesses will be thriving in the recently reopened economy, but they will continue to watch interest rates very closely as this will directly impact how much they are able to borrow at a crucial time. 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 be at the very heart of economic growth as we create an economy fit for the twenty-first century.

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.

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

Against all odds, inflation has slowed. However, this is likely a one-time blip as a number of contributory factors will likely create inflationary pressure in the next month, most notably the global price increase in fuel. This, combined with the fallout from supply chain issues caused by the pandemic, an ongoing skilled labour shortage, and rising food prices due to higher production costs, has created the perfect storm and will no doubt impact inflation soon.

With so many economic obstacles in play, all eyes will be on the Bank of England to intervene. While getting the Bank to agree to raise interest rates may feel like pulling blood from a stone, progress appears to be on the way, with Andrew Bailey suggesting that the central bank may soon be forced to act to curb inflation, though it is unclear when this will be.

Meanwhile, as the value of cash savings continues to erode due to rising inflation, long-term savers should consider long-term investing as an alternative to keeping money in cash or savings accounts.

What does the Bank of England make of the figures?

Following Bank of England’s Governer Andrew Bailey’s announcement that the Government will soon be taking measures to act on inflation, Tom Stevenson, Investment Director for personal Investing at Fidelity International shared what he believes will happen next.

There’s no doubt about the big story in markets this week – inflation. The messaging from across the pond last week has largely been confirmed by Andrew Bailey, Bank of England governor, as it becomes clear that we are close to seeing the end of the emergency interest rate of 0.1%.

While the Bank of England’s long-held view that the rise in inflation would be temporary still stands, Bailey said that he thought price rises would persist well into next year, blaming rising energy prices for the continuation of inflationary pressures. Supply chain issues and a tight labour market are also contributory factors. Investors are worried that this is ‘bad inflation’ – a consequence of rising energy costs and higher wages and not a response to rising demand and activity.

The governor’s comments have triggered a major change in market expectations. Only a few weeks ago, markets were pricing in a first rate-hike next summer, now it could be before the end of the year. Investors should keep an eye on official inflation statistics published on Wednesday and, of course, the Chancellor’s Autumn Budget next week.

Sukhdeep Dhillon, Senior Economist at BNP Paribas Real Estate, expands on this.

The debate surrounding temporary versus persistent inflationary pressure intensifies this morning as the September inflation rate remained above target, 3.1% in the 12 months to September 2021 – down from 3.2% in August.

Although temporary factors continue to push up inflation, the rate is likely to remain elevated over the next two years, and this, combined with slowing output and an earlier than anticipated potential rate hike is creating a real tightrope for the Bank of England to walk.

The Governor voiced concerns this week with inflation likely to rise above 4% at the end of the year, sending a signal that the BoE is gearing up to raise interest rates. The markets expect the first rate rise to be delivered at the December meeting.

Is this the new ‘new normal’ or the result of the UK emerging from the pandemic?

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown compares the announcement to the same time last year, and analyses what could possibly happen in the future as the UK moves slowly towards the end of the Covid-19 pandemic.

The latest CPI reading has come in a touch lower than August at 3.1%, after the artificial blip from last year’s Eat Our to Help Out scheme dropped out of the figures

It is forecast to reach 4%, double the Bank of England’s target by the end of the year, and potentially 5% by next April. With prices staying stubbornly high and another surge expected, a gentle rise in interest rates before the end of the year still looks likely if there is any chance of keeping a Goldilocks economy within reach.

Too much inflation in the mix risks the economy getting too hot, leading prices to spiral upwards. If rates are pushed up rapidly, there’s a risk it gets too cold, freezing off economic growth. A 2% inflation target is considered just right, as long as the economy also keeps growing.

But the recovery is already judged to be cooling rapidly due to supply chain issues, labour shortages and energy price surges. Avoiding the bad dream of stagflation will still be the priority, rather than the lofty aims of a goldilocks economic utopia. If gas prices continue to spike and power rationing is introduced by energy intensive industries, economic growth could be knocked back into a downturn. While there is still dissent around the table, and there is a chance this slightly lower reading may hold off members of the Monetary Policy Committee from voting for a rate rise in November, the financial markets have largely priced a rate rise in by the end of 2021, followed by further rises next year.

A certain amount of nervousness ripples through the financial markets at the very thought of a rate hike, given that investors have become somewhat used to this era of ultra-low rates, so this edge downwards in CPI in September may provide some short term relief.
But even if the Bank of England does raise the base rate by a few notches in the months to come, it isn’t forecast that it will go much beyond 1% next year.

That is because central bank policymakers still believe inflation is transitory. Like porridge without enough milk, it’s sticking around for a lot longer than was previously thought, but is expected to ease off as pandemic supply chain issues finally lift.

However ultimately we still don’t know if rising prices will become the new ‘new normal’ or if they’re just a temporary result of us emerging from a pandemic and a year of lockdowns and restrictions. There are worries they will linger for a lot longer. Make UK , the manufacturers organisation has warned that inflation risks becoming baked in, and the Food and Drink Federation has also warned that soaring ingredients prices will lead to a bubbling up of prices in bars and restaurants.

Even if there is a rise of the base rate to 1% it would see interest rates back at 2009 levels, a time when the economy was in the recovery position following the financial crisis, but would still be very low on a historic basis.

Even so unwinding mass bond buying programmes, which has made borrowing cheap is also likely to be a slow process. The last shock governments want right now is to see the rate of interest they have to pay on their debts escalate, and central banks will be keen to avoid any kind of ‘taper tantrum’ on the bond markets, witnessed in 2013 when US treasury yields rose sharply after the Federal Reserve announced a roll back of its quantitative easing programme. So rate rises are likely to be incremental, accompanied by soothing words of assurance that soaring inflation will ultimately end up being fleeting.

Should the Chancellor cancel proposed £900m business rates hike plan?

Following CPIannouncement, property consultancy Gerald Eve is calling for the Government to announce a uniform business rate (UBR) freeze in next week’s budget, to prevent a £900m increase in business rates in April. The business rate uplift each April is based on the CPI from the previous September. Jerry Schurder, Business Rates Policy Lead at Gerald Eve, spoke to Business Leader.

British business is being battered by crisis after crisis; the last thing it needs now is a massive tax raid.

The pandemic disproportionately hit the retail and hospitality sectors which faces a £240 million inflationary hike next year; now staff shortages and supply disruptions are a daily challenge. Support for these fragile sectors of our economy needs to continue.

We all know the country’s finances are in a parlous state after the pandemic, but an increase in the burden of tax will force more businesses to the wall which will ultimately reduce the tax take. British business rates are already the highest tax of their type in the world and urgently need root-and-branch reform.

The Government must stick to its manifesto commitment reduce the burden of business rates and, as a minimum, must start by freezing business rates next year.