Inflation has been on the rise in recent months, with the Consumer Price Index (CPI) and the Consumer Price Index including owner occupiers’ housing costs (CPIH) both reaching peaks not seen in decades. This means that businesses may have to deal with increasing costs of materials, energy, and other related services. How exactly are these rising costs affecting businesses? And what can businesses be doing to mitigating the risks and problems they may face in the upcoming months?
According to the latest figures from the Office for National Statistics, in the 12 months up to November 2022, CPIH rose by 9.3%. While this is down from 9.6% in October, this is still the highest CPIH rate for November in 40 years.
Likewise, CPI went down from 11.1% in October to 10.7% in November 2022. The October rate is the highest CPI rate recorded since the series began in January 1997.
This biggest contributor to the fall in both CPI and CPIH rates in November come from transportation inflation rates being down for the fifth consecutive month. At a high of 15.2% in June, November 2022 had an annual inflation rate of 7.6%. Between this and a handful of other sectors, like clothing and footwear there is some notable downward movement for CPI and CPIH rates.
On the other hand, hotel and restaurant inflation rates have gone up since October. In November, inflation hit 10.2% from 9.6% the month previously. Other sectors are also seeing new highs, like annual inflation for food and non-alcoholic beverages rising again for the sixteenth consecutive month- from –0.6% in July 2021, to 16.5% in November 2022.
For businesses, these figures mean that they will soon be feeling the effects of inflation as costs rise across the board- particularly with energy costs. These higher costs could put pressure on profit margins, while also impacting customer service levels if owners are pushed to increase prices as a result.
A Smart Energy GB poll found that three quarters of small business owners have already had to raise prices, and 77% of those that have not already expect that they will have to within the next year- if costs continue the same way. Most of those that have raised prices report that they did as a last resort, and though customers have been understanding, more than half that have raised prices believe they have lost clients as a result.
From another perspective, the increasing costs put a strain on business owners’ mental health too. A study commissioned by HSBC found that 26% of small business owners believe the increased cost of living is causing a decline in mental health, and many of them are reluctant to talk about that pressure- more than half have not discussed the impact rising costs are having on them and their business. Few owners are seeking support too, the majority have not talked to their bank about financial support, and a third have used their personal savings to support their business.
There are several steps a business can take to prepare for rising costs and protect themselves against rising inflation. The first one should always be reviewing the costs and spending in a business- that way owners can identify which spending is essential, and where costs can be cut back. Asking which costs are most exposed to inflation, and which ones are of most importance can help prioritise where the focus should be.
Business owners should also consider negotiating better deals with suppliers. Finding discounts or flexible payment terms when purchasing materials, services in bulk, or locking into fixed-price contracts can benefit businesses with long-term savings without having to worry about price fluctuations due to inflationary pressures.
One other way that businesses can protect themselves against rising costs is, if the business is poised to do so, make investments that will streamline processes in the company. A good example could be energy-efficient technology or renewable energy sources such as solar panels or wind turbines which can help lower bills over time and save money on energy usage overall. Investing in staff, with higher wages to foster loyalty and morale, can also be a good strategy for those with the resources to do so.
Finally, raising prices can be a necessary last resort. But implementing this with proper internal communication for consistent messaging and transparency with customers can help ease any pushback from a customer base that is also struggling.
Business owners should take note of the recent inflationary trends and prepare accordingly if they want their business operations to remain profitable and competitive in today’s market environment. By investing intelligently, taking advantage of discounts offered by suppliers, and staying informed about industry trends, business owners can protect themselves against rising costs associated with higher inflation rates and ensure their operations remain strong even during economically challenging times. It will also be important for them to monitor how other companies are responding to these changing conditions so they can learn from best practices and develop more resilient strategies going forward.