What do the latest inflation figures really mean for your business?

UK inflation rates have risen to 4.2% in October as a result of the UK recovering from COVID-19 and the ongoing supply chain disruption.

This means that the cost of living has surged at its fastest pace in a decade.

The figures, from the Office for National Statistics (ONS) revealed that aside from the coronavirus pandemic and logistic challenges, the rise in inflation was down to higher fuel and energy prices, the rise in cost of second hand cars (27.4% compared to October 2020) and increased costs for dining out.

In total, gas bills rose by 28.1% when compared to October 2020, and electricity costs climbed by 18.8% over the same time period.

This morning, the Bank of England announced that it may have to increase interest rates in the New Year in order to stop rising prices across the UK economy. Petrol prices increased by 25p when compared to the same time last year.

Earlier this month, Bank of England Governor Andrew Bailey warned the public that inflation rates could increase to 5% before it could start returning to pre-Covid levels.

More uncertainty on the horizon?

Sukhdeep Dhillon, Senior Economist at BNP Paribas Real Estate shares her thoughts on the impact the figures will have on the UK business community.

Following a brief period of respite for the markets inflation reached 4.2% in October, the highest rate in a decade. This increase has been underpinned by a sharp rise in utility prices, with consumers seeing first-hand the impact rising inflation will have on the cost of living and their everyday purchases.

Businesses looking for an uneventful end to the year are likely to be out of luck with more uncertainty on the horizon. A tight labour market combined with increased concerns from the Bank of England about surging inflation only amplified the possibility of a Christmas rate rise.

Andrew Bailey will have been pleasantly surprised by stronger than expected labour market data for September, which has seen unemployment continue to fall despite the furlough scheme coming to an end. Yet, with high inflation sticking around this may force a response from the Bank of England in just a matter of weeks.

‘Brits have every right to worry if Andrew Bailey is’

With the latest ONS inflation figures confirming a rise to 4.2%, Shachar Bialick, CEO and founder of Curve, a financial super-app, shares his thoughts.

If Andrew Bailey is uneasy about rising inflation then Brits have every right to feel worried. Inflation is already rising and with UK inflation expected to hit 5% next Spring, well above the 2% government target, household income will be hit hard. US inflation is also at its highest level for more than 30 years at 6.2%. The vast majority of the world is pegged to USD, meaning the impact of high US inflation will be felt globally. We can’t disregard the impact inflationary pressure in the US will have on the entire world, including in the UK economy and our own personal finances.

Personal income suffered for many during the pandemic with widespread job losses, furlough and business closures. We may be nearing the end but we’re still in a crucial recovery phase. Supply shortages, gas price rises and rent increases are just some of the factors squeezing household income. An interest rate rise is also on the horizon which will benefit savers, but anyone with a mortgage or loan could see their payments go up.

Brits need a flexible approach to their finances. The ability to move payments from one card to another, make the most of benefits and cashback on offer, and free up money from past transactions. This will help people to meet current and future financial requirements, helping to ease some of the financial strain caused by rising inflation.

What will the Bank of England do?

Following the news this morning that inflation has hit 4.2%, the highest rate in a decade, Will Walker-Arnott, Senior Investment Manager at Charles Stanley provides his analysis on what the Bank of England will do in response.

It’s almost certain that the Bank of England will respond in order to curtail further inflationary pressures, so we should expect an interest rate hike in December. UK employment is also in a positive position at the moment, with unemployment having fallen by 0.2% and an additional 247,000 workers joining the payroll in September.

More employment data due in December will provide confirmation on the residual impact the furlough scheme has had on the labour market, which is just ahead of the next BoE interest rate decision, and this information will also be key in terms of formulating monetary policy maker’s opinions on interest rates.

The big debate in financial markets at the moment is whether this inflation is going to be sticky or just transitory. As a firm, Charles Stanley is sitting in the transitory camp and would expect inflation to start ticking down in the second half of 2022 as we return to some normality. We’ll also have easier comparables. At the moment we’re comparing with lockdown in 2020 which makes inflation look inherently worse. There are secular deflationary forces around and we have faith in human ingenuity as well as the belief that there will be an ability to overcome supply chain bottle necks.

What impact will Christmas 2021 have on inflation statistics?

British SMEs are starting to feel more confident about the performance and resilience of their own businesses, despite challenges in the wider economy, according to the latest quarterly Barclaycard Payments SME Barometer.

Over half (54%) of UK SMEs are expecting revenues to increase in Q4, compared with performance in Q3 2021. Yet concerns about inflation and rising bills are having a broader impact, with 64% feeling neutral or optimistic about the UK economy, down from 76% in Q3 2021.

As the Christmas shopping rush gets underway, data from Barclaycard Payments, which processes £1 in every £3 spent using credit and debit cards in the UK and services over 350,000 SMEs, shows that in the three months up to 31 October, transaction volumes among this group were up 38.1% (versus 2019).

Encouragingly, following last year’s restrictions, the research also shows that almost three in 10 (29%) SMEs predict the upcoming festive trading period will be their most successful since 2015.

Year-on-year payments volumes are also showing strong growth – up 21.9% across the board – with the retail, food & drink and leisure & entertainment sectors benefitting from 15.58%, 27% and 54% uplifts respectively.

While consumer confidence has declined against a backdrop of inflation and rising utility bills, business owners which anticipate a rise in revenue attribute this to: an expected boost in sales as they believe Brits will be having larger celebrations after spending Christmas 2020 apart from many of their families and friends (25%), an increased preference for small businesses among shoppers (14%) and customers choosing to spend more with small businesses (10%).

The majority of businesses also remain relatively confident (56%) in the resilience of their supply chains, despite a small decline in sentiment compared to Q3 2021 (59%). Reassuringly, as Christmas shopping peaks, over seven in 10 SMEs (71%) have put measures in place to limit the impact of supply chain challenges, which includes 85% of retailers when looking at specific sectors.

Colin O’Flaherty, Head of Small Business at Barclaycard Payments, said: “It’s encouraging to see that small and medium businesses are feeling positive about their performance ahead of the festive period. While the overall economic backdrop remains challenging amidst rising prices, slowing economic output and muted consumer confidence, UK SMEs continue to impress me with their resilience and their focus on controlling what they can control to meet the needs of their customers as they’ve weathered the ups and downs of the past 20 months.

“While there may still be challenges that lay ahead, the data from our Barometer indicates SMEs are right to feel cautiously optimistic about the prospects of their own business as they head into 2022.”

Kate Hardcastle MBE, Business and Consumer Expert, said: “It is exciting to see that so many British businesses feel they’re coming out the other side of the pandemic stronger, but they must remain cautious to the macroeconomic environment, which is vital as we head into what is typically their busiest trading quarter. This postive picture can be attributed partially to their agility and ingenuity, but also to the UK public, which has doubled down on its efforts to support small companies and their local high streets.”