Understanding how inflation affects your business

There are a number of contributing factors to high inflation:  

• COVID-19 – The pandemic has disrupted supply chains across the world, lengthening lead times and increasing production costs.  
• War in Ukraine – The Russian invasion of Ukraine has dramatically increased food and energy costs through a combination of Western sanctions and damage to infrastructure.  
• Labour market changes – The number of job vacancies in the UK has reached a record high, meaning that labour costs have risen sharply as companies try to attract workers.  

When inflation rises faster than income and wages, the ability of consumers to purchase products and services is reduced.  

The consumer goods seeing the highest levels of inflation in the last 12 months are:  

• Food and clothing (5%)
• Alcoholc and tobacco (11%)
• Restaurants and hotels (8%) 
• Health (6.6%)

At the same time, average weekly wages (excluding bonuses) have dropped in some industries over the last 12 months.

This indicates that the purchasing power of UK consumers has been diminished by inflation, which poses obvious challenges for UK businesses.  

*Figures quoted above are the latest available at the time of publication. To find the most up-to-date figures, visit: 
ONS Consumer Price Inflation 
ONS Labour Market Overview 

If inflation is reducing the purchasing power of consumers, then one of the impacts on businesses could be fewer sales and weakened demand for their products and services.  

Companies may find that it is harder to conduct business development activity and make sales in the current market and might therefore see revenues and profitability taking a hit.  

Profitability could also be negatively impacted by the fact that businesses themselves are having to contend with rising costs on things like materials, equipment, premises and labour.  

Due to rising interest rates, the cost of borrowing will also be increasing, making it more expensive for businesses to service their debts.  

Not all of these costs can be passed on to the consumer, especially when purchasing power is diminished.  

Another impact of inflation is on business investment. After a record-breaking 2021 where businesses raised more money than in any other comparable year, projections since then look more muted, meaning that businesses looking for finance may find it more difficult.  

If prices and interest rates continue to rise and sales and business investment continue to fall, then the result of this will be a much more challenging business environment where the UK economy is contracting.  

That being said, there are many things that businesses can do to reduce the impact of inflation.  

Many of the things that businesses can do to reduce the impact of inflation are simply good practice in any business environment.  

Here are some things to think about doing if you’re worried about inflation.  

1. Understand your impact. Think about whether or not your products and services fall under essential or discretionary spending to understand how inflation could impact your sales.  
   
   
2. Reduce your costs. Look at your current overheads – people, power and premises – and calculate whether or not your current revenues can justify your costs.
     
3. Invest in efficiency. If you’re struggling to reduce costs, look at what you can do to improve productivity and efficiency.  
   
   
4. Find financial support. Take advantage of the funding, grants and support that is available in your area. The UMi Funding & Grants Finder and UMi Loan Finder can help.
    
5. Diversify your offering. Hard times can spur innovation so think about ways to adapt your products and services to find new customers and tap into new markets.
     
6. Increase prices. All businesses are increasing their prices at the moment so while this shouldn’t be your first action, it’s inevitable that some of the costs you face will have to be passed on to your customers.
     
7. Communicate effectively. Make sure that any changes you have to make to help your business survive are communicated at the right time and in the right way.