UK sees highest inflation in a decade but what does that mean for small businesses?

CPI inflation hit 5.1% in November, reaching its highest point since September 2011.

However, despite increasing by 0.7% over the month, market commentators think that the peak could be a way off yet.

What does this mean for small businesses?

We’ll start with the obvious, as a measure of the cost of living a rise in CPI directly impacts the prices we are paying for things.

The Office for National Statistics highlighted the rising cost of fuel and buying cars as being two of the main factors driving the CPI rise. This means directly rising costs for many employers with mileage and company car schemes.

The cost of raw materials also rose significantly, so for any smaller businesses who manufacture goods or in the food and drink/hospitality industry they must choose how much of the rise in cost to pass on to customers.

The increasing cost of energy also has a direct impact on businesses, who are not protected from price rises to the same degree as consumers.

Employees may also feel less happy with their wages as the cost-of-living increases. The most recent figure on average pay rises for the year was 4.3%, leaving many effectively facing falling living standards.

The jump in inflation, twice the rate of the target set by the Bank of England, has also intensified debate over whether the Bank should increase interest rates.

So far the Bank has resisted any rate rise, keeping rates at their record low.

If CPI inflation continues to rise at such a steep rate, it seems unlikely they will be able to hold off on increases for long and that early 2022 seems set to bring an increase in the base rate.

Whilst banks are free to set their own interest rates for borrowing, savings and mortgages, they inevitably follow the base rate to some degree.

This means that on one hand, whilst the cost of borrowing would rise, for those with cash savings held in interest-based accounts would see greater returns.

With higher interest rates incentivizing saving rather than spending, there could also be a knock on for businesses and the economy as a whole.

Whilst the Bank seems to be indicating that it does not have any plans to raise rates at its next meeting on Thursday, it is coming under pressure to act, and has indicated that rate rises may come before Christmas.

With 5.5% CPI forecast for the spring, the International Monetary Fund (IMF) has been leading the charge against inaction.

The IMF’s annual review of the UK economy earlier this week said that whilst the UK has recovered from the pandemic faster than expected, if the Bank does not react to inflationary pressures it would be setting a precedent of “inaction bias” that could become entrenched in the UK economy.

I am no economist, so I won’t pretend that I know the answer.

However, I will say one thing, and that is that all small businesses should keep a close eye on inflation figures and the Bank of England over the next month as no business will go unaffected, whatever the course of action taken.