Office for National Statistics (ONS) data revealed that the Consumer Price Index (CPI) – the official measure of inflation – remained at 8.7 per cent in the 12 months to May 2023, the same rate as for the 12 Months to April 2023.
While the rate of inflation is not as high as in earlier months, where it peaked at 10.4 per cent in February, many economists had predicted a significantly lower rate of inflation.
As inflation is falling at a slower rate than expected, the Bank of England (BoE) has attempted to curb this by increasing the base rate further to five per cent.
High inflation and the increasing base rate are having a significant impact on many businesses in various ways including:
Higher prices and costs are feeding the current rate of inflation. As the cost of raw materials, labour, and operational expenses rise, businesses profit margins are being squeezed.
While larger businesses may have the capacity to deal with these increased costs, small and medium-sized enterprises (SMEs), often operating on tighter budgets, can find this situation particularly challenging.
Some businesses facing increased costs are mitigating this by raising the prices of their products or services.
This move needs to be handled carefully, however, as if prices are increased too much then it could drive customers away.
Equally, SMEs need to review their cost base with a view to identifying whether there are any cost savings that can be made.
Interest rate increases naturally mean that taking out loans will be more costly for businesses looking to borrow and will also affect any existing loans that are not on a fixed rate.
Increased interest rates can be a significant worry for businesses carrying a substantial amount of variable-rate debt, as higher interest rates ultimately mean higher borrowing costs.
While the current five per cent base rate is the highest it has been since 2008, economists predict that interest rates could peak at six per cent by the end of 2023 – something businesses should consider as they plan their budgets for the next 12 months.
The higher rates of interest have also affected access to finance, as lenders adjust their approach to lending due to concerns about businesses servicing their debts. Many are, therefore, applying more stringent credit and affordability checks.
As amounts owed to HM Revenue & Customs (HMRC) track the BoE base rate, as the rate of interest increases, so does the cost of late tax payments.
Although inflation rates are currently higher than predicted, the BoE hopes that the increase in interest rates will see the inflation rate fall in the coming months, as they attempt to push it down closer to the two per cent national target.
If you are a business owner who would like assistance navigating the current economic climate, please contact our expert team today.