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Rising Inflation rates are all we can hear in our headlines, but how does this affect your small business?
Inflation measures how much prices for goods and services rise over time.
Inflation rates in the UK are setting new record highs, currently at 9.1 as of May 2022, The ONS (Office for National Statistics) released the latest inflation figures, showcasing the headline figure rising by 9 per cent in the 12 months to April 2022. This is the sharpest jump since 1982.
What is inflation?
Inflation is a normal part of the economy. Usually, it encourages spending. If prices are expected to rise over time, consumers will purchase goods now rather than wait.
If inflation is too low consumers are put off spending their money with businesses and if too high businesses struggle to set prices as demand overtakes supply.
What is the current rate of inflation?
The current rate of inflation is 9 per cent. However this changes monthly as it is based on the CPI ( consumer price index), which tracks the prices of everyday items.
This is called the basket of goods and new items are always updated to reflect ever changing trends. You can check the current rate of inflation at the Bank of England.
The rising cost of electricity, fuel and gas are contributing heavily to increasing inflation.
The target rate of inflation is 2% . The Bank of England says this is to keep inflation stable and to help “everyone plan for the future”.
Why is inflation rising?
Following the coronavirus pandemic and global lock-downs inflation rates have steadily risen.
As economies opened up last year, people were able to spend their money again. Demand for certain goods and services increased, putting pressure on businesses and supply chains.
Furthermore,a lot of people changed their jobs following the pandemic. This shift in the labour market has led to higher wages, increasing costs for businesses, which eventually get passed on to the consumer.
Additionally, the war in Ukraine and sanctions on Russia have led to more pressure on fuel and food prices.Many EU countries rely on Russia for their oil and gas. With imports banned, they have to source oil and gas from elsewhere, affecting supply.
The ONS stated that the largest upward contributions to the inflation rate in April 2022 came from transport (including motor fuels and second-hand cars) and housing and household services (including gas, electricity and other fuels) .
Will inflation keep rising?
While the Bank of England’s deputy governor previously said that “inflation may still prove temporary”, according to The Telegraph, the central bank now believes inflation will hit 10 per cent this year and go down next year.
This is because of the war in Ukraine as well as current lock-downs in China, making it difficult to import some items to the UK.
How does inflation affect your small business?
Rising prices don’t just affect consumers. As mentioned, wages increase as employees ask to be paid more to compensate for increasing inflation (or move jobs altogether).
Businesses are affected by supply pressures as they pay more to buy materials and products. They may have to wait longer until stock becomes available and incur increased shipping costs and times.
Supply shortages for raw materials like timber can also impact prices.
You might have already experienced problems with your supply chain, as well as labour shortages if you’re looking for staff.
Consider these steps to tackle inflation:
- Audit your prices. A fresh break even analysis could help you work out whether price increases can lead to better profit margins. However be careful here, as customers may be used to current prices.
- Audit your costs. Look over your expenses to see if you can reduce them. Can you cut any inefficiencies? learn manufacturing principles may help you find ‘waste’ in your current processes.
- See if you are eligible for any R&D tax relief. If your business is always trying to innovate and constantly researching and developing new products/ services R&D tax relief/ credits is a very viable option to save money.
Generally, come up with new plans and forecasts. As the world changes, your plans may need to change too. Take a look at your business plan to see whether there’s anything that needs updating. You can also create a new cash flow forecast and do a fresh budget.
How is rising inflation affecting your business? Let us know below.
Who We Are:
Swanson Reed is one of the UK’s leading R&D Tax Relief consultancies. We manage all facets of the SR&ED tax credit program, from claim preparation and audit compliance to claim disputes.
If you would like to find out more about how your business could benefit from R&D Tax Credit, contact a Swanson Reed R&D Tax Advisor today.