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What does rising inflation mean for businesses in 2022?

Consumer inflation has risen to its highest level since 2011, increasing from just over 3% in September to 4.2% in the year to October. And as we look towards 2022, prices look set to rise further.

This is a hot topic over on the UKBF forums at the moment. Unsurprisingly, it's a real concern for small business owners.

'I am very worried about inflation. I cannot emphasise how bad things are. Every time I want to order stuff, especially stainless steel stuff, I have to get the latest rates from suppliers because the prices are going up so often. It's madness and very frustrating,' says @Justin Smith.

@Don'tAsk has had a similar experience. 'A 2kg box of 'No Nonsense' powder filler from Screwfix has gone up 25% recently and timber prices are through the roof.'

Others are seeing predictive increases, like @The Byre. 'We are (as a company) seeing predictive increases in energy and other costs for next year's contracts. The suppliers are expecting further increases over and above those that have already come through and pricing accordingly, they say.

'When people begin to calculate future increases in prices that have not happened yet, that is when inflation gains its own momentum and becomes dangerous.'

Why is inflation rising?

So what's causing the rise? Official data from the Office for National Statistics shows that the main pressure came from rising utilities costs. Electricity is up 18.8% and gas by 28.1%, reflecting the global surge in energy prices.

According to The Office for Budget Responsibility (OBR), which provides independent analysis of the UK's public finances, a number of other factors are involved when it comes to business.

Supply bottlenecks have been made worse by changes in migration and trading following Brexit and labour shortages have also emerged in some occupations.

The effect on small businesses

The Federation of Small Businesses (FSB) says that more than three-quarters of small businesses have reported higher operating costs in Q3 of this year as a result of these pressures.

'Businesses will have to make difficult decisions about how to cope with these increased costs, including how much to increase their prices to customers. This itself will drive inflation, and at a time when many clients are being forced to tighten their purse strings,' said Martin McTague, National Vice-Chair of the FSB.

"Another pernicious effect of inflation is that it exacerbates poor payment practices, as some firms facing a cash squeeze will use every trick in the book to delay payment. This causes a ripple effect which hurts all parties involved further down the supply chain.'

Martin warns that small businesses on the receiving end of late payments may have to turn to finance providers to avert a cash crisis. Others may max their credit cards or borrow from friends or family, leading to debt problems in the future.

What's predicted for 2022?

The OBR expects to see output growth decline in the coming quarters, with raising prices putting pressure on wages. It warns that inflation could peak close to 5% next year and could hit the highest rate seen in the UK for three decades.

Unfortunately, there's more pain to come too, in the form of tax rises next April. That's when the 1.25% increases to National Insurance contributions and the dividend tax come into effect.

The Bank of England's latest forecasts paint a similar picture. It predicts that inflation will rise to around 5% in 2022. But there's a glimmer of hope too - the report estimates it will drop back down closer to its target of 2% by the end of next year.

How can small businesses weather the storm?

Many firms are taking steps to try and reduce the impact of rising prices, including buying supplies in bulk, focusing on core product lines and cutting their own operating costs.

The FSB is calling on the Government to increase the Employment Allowance. If this happens, it could help to mitigate the impact of National Insurance contribution increases and rising inflation on small employers. It also advises small businesses to lean on their networks.

"Learning from peers and building strong relationships with suppliers and customers are sensible strategies to pursue. Being part of local and national business networks can help small businesses know where to turn for trustworthy and actionable advice, which is vital," Martin said.

How is your business being affected by inflation?

Have the issues raised here affected your business yet, or are you worried about the impact they may have in 2022? Tell us your experiences in the comments or join the discussion.

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ChrisGoodfellow
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