How Could Inflation Affect Your Business

According to leading think tank, the National Institute for Economic and Social Research, UK inflation will quadruple to about 4% in the second half of 2017. Many shoppers will already have noticed that the price their weekly shop has been increasing, with Marmite, Typhoo, and other food manufacturers admitting that they have had to raise prices to make up for the falling pound. Business owners too, though, should be aware how this could impact their business moving forward.

How Does It Work?

While inflation is a complex subject, at its simplest it refers to a rising price of goods and services and the increased cost of living associated with this. In the UK, inflation is measured against two different indices: the Consumer Price Index (CPI) and Retail Price Index (RPI). Both of these are calculated by taking a basket of typical household goods like clothing, food, and petrol, and comparing what they cost last year with their current price. RPI is calculated similarly, except that RPI also takes into account the rise in things like council tax, mortgage payments, and the cost of rent. If you notice that the rate of inflation being advertised is different from two different sources, check to see which metric they’re calculating it from.

What Does This Mean for Your Business?

One of the biggest problems for business during times of inflation is the uncertainty that it brings. If inflations levels are higher than expected, many firms will be less willing to invest because they cannot accurately predict future costs or demand. The most recent figures from the Office for National Statistics actually show that the CPI inflation fell to 0.9% in October, below the 1.1% that was predicted.

However, the price of goods leaving factories was shown to have risen by 2.1%, faster than expected and the biggest increase for over four years. Overall costs faced by producers for raw materials and oil jumped to a monthly record at 4.6%, leading some to worry about the prospect of cost-push inflation. This occurs when there is a substantial increase in the cost of important goods or services where no suitable alternative is available. A rise in inflation may also have effects on interest rates and bank accounts favoring businesses and individuals alike.

How Can Your Business Combat Inflation?

Many business look to tackle the risks of inflation by making certain changes early on before the full effects take place. For example, by raising prices now, even if it’s by just one or two percent, you won’t have to worry about hitting your customers with a big price increase all at once when inflation spikes. This can make your goods much more appealing compared to the competition who decided to wait.

Finally, when it comes to dealing with your personal savings, consider holding your money in an index-linked savings account. This will ensure that the value of your savings keeps up with inflation and that you aren’t at risk of losing any of your capital.


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