Managing Impact as UK Inflation Hits 10-Year High
The UK cost of living surged at its fastest pace in nearly 10 years this year with Consumer Prices Index (CPI) reaching 4.2% in October. Causal factors are said to mainly be higher fuel and energy prices.
Inflation is up since Covid restrictions ended and the economy reopened. The Bank of England said it may raise interest rates in coming months to tackle rising prices. October 2021′ reading was far higher than the 3.1% rise recorded in the year to September and more than double the 2% Bank of England target rate.
An ONS report showed owner-occupier housing costs rose to 3.8% in 12 months to October 2021, up from 2.9%. The largest contribution came from housing and household services (1.23%), transport (1%), restaurants and hotels (0.43 %).
Why does this matter?
Inflation is a measure of how much goods like TVs, food, haircuts and train tickets have gone up over time. This is measured year on year, the average increase being the inflation rate. The government sets a 2% inflation rate target which helps businesses set prices and people plan spending.
As rates go up with costs of living risking (petrol tanks costing on average £12 more to fill for example), the bank has to address issues by increasing interest rates which can hit savers, borrowers, pensioners and mortgage holders.
This also causes supply issues like shortage of builder materials and computer chips, further pushing prices even higher. As cost of transport, hotels, electricity and food become more expensive it gets harder to maintain a lifestyle. Higher interest rates that follow then impact. It may be on the cards, and this can affect savers adversely and mortgage holders.
What does this mean for businesses?
Rapidly rising inflation can mean consumers are more cautious about making purchases and it’s a good idea to avoid sudden price rises that encourage consumers to look around for cheaper alternatives. A gradual plan for price increases is probably a more sensible option for businesses.
Inflation will also affect the prices you pay for stock and expenses, so now is a good time to reflect on stock levels to consider alternative sources of supply and review profitability of products, goods and services to ensure profitability. In uncertain times, plan ahead to remain resilient:
- review budgets and targets for 2021/2022
- chase up overdue invoices
- ensure exacting payment terms
- agree extended payment terms with suppliers
- review banking facilities, discuss future needs
- review sales processing, order fulfilment, shipping, challenge need for steps
- review staffing, products and services, eliminate those that are unprofitable/not core
- establish key performance indicators (KPIs)
- measure daily e.g. sales leads, orders, cash balance, stock turnover, gross/net profit
It’s important for businesses to plan ahead. Also read our blog on Scenario Planning.
Talk to us at LHP about planning ahead as our team of business advisors have considerable experience with helping our clients with their strategy and sustainability. Let’s Talk.