With the UK Inflation rate rising from 0.6 percent to 1 percent , it is only expected to question the effects these fluctuating figures have on the Economy and more specifically, the effect they have on Business Finances.
What is Inflation?
It is defined as the rate at which the prices of goods and services increase and decrease over time and is expressed as a percentage and measured using three estimates that are the indicators of the financial well-being of a country.
The three estimates are The Consumer Prices Index (CPI) which is an estimate of the prices of commonly purchased goods; the Consumer Prices Index including owner-occupier’s housing costs (CPIH) which is CPI plus extra expenditure associated with the consumer’s housing, and then finally there is the Retail Price Index.
Once determined, these rates will have different effects on every economy and business level. For example, if the price of bread increases by 2 percent a year, it means that after two years, consumers will be spending 2 percent more when purchasing bread.
As much as this might seem to be good for the business owners, it might not be the case especially if this rate increases with no increase in Wages or salaries, a case that will drive away consumers who have no finances to afford the increased prices.
Current Rates in the United Kingdom
In July 2020, the Rate in the United Kingdom was determined to be 1 percent, a rise from the previous measurement which was 0.6 percent. This was a much bigger increase than originally expected. Although the rate rose, it is still below the United Kingdom’s target, which is 2 percent. Furthermore, as a result of the coronavirus pandemic, the Bank historically cut interest rates to its lowest figure yet of just 0.1%. This was a strategy designed to provide support to the economy back when it all began in March 2020.
Additionally, the CPIH 12-month rate was 1.1 percent and was majorly contributed by the rise in clothing, petrol, and household goods prices while the CPI 12-month rate was 1 percent.
The Effects of these Rates on Businesses
Whether there is an increase or decrease in the rates, the capital expenditure of a country is still going to be affected. When the rates are high, the cost of goods and services will increase and when the price rate is low, the prices will reduce.
Moreover, hyper-inflation can have adverse effects on the Business Finances in that, when the prices of goods and services rise quickly and out of control, it affects the currency exchange rates, brings about an export slump and in worst-case scenarios, the country’s currency might lose its value.
Thus, making it harder for start up or growing businesses to acquire loans from the bank and if they do manage to secure a borrowing, interest rates are likely to be higher.
On the other hand, low rates are not entirely good for Businesses either. The low prices put on goods and services without a reduction in housing expenses will cause a dent in the owners’ pockets due to the low profits made. However, low rates can in turn increase employment levels across the UK.
Therefore, more disposable income will be available to consumers to spend on goods or services.
The perfect solution for any economy is, therefore, a balanced situation which can drive the economy as a whole. For the United Kingdom, the Government balanced rate is set at 2 percent and rates above or below this figure can contribute to the reduction of the value of the UK currency. Considering we are currently at 1 percent, which is under the ideal balanced rate, the Bank of England will keep cutting interest rates. This could benefit business finances because it means that the cost of borrowing will remain lower and encourage spending across the country.
But as much as this is a stimulus for economic growth, it is very hard to achieve and even harder to maintain.
It is important to remember that these rates are only an average rate that determines the prices of certain products. How they affect household finances or business finances is dependent on individual circumstances.
That is why when it comes to businesses, fluctuating rates might not do any harm on a large corporation’s finances but might wreck the boat when it comes to small businesses. Therefore, it is important for small businesses and startups to keep their eye on inflation rates and the economy so they can be prepared for what is likely to happen. However, with the current state of the economy, interest rates will remain low. You could say that now has never been a better time for aspiring entrepreneurs to set up their start up businesses.
On the other hand, the large corporations, which are generally well equipped with solutions to deal with the brunt of these rates in a way are far better than a small business that might not be ready to face the brutal force of reduced or increased price rates. Although, the pandemic has seen big brands such as Debenhams, Victoria’s Secret and DW Sports. In addition to inflation rates, big and small businesses must consider all the external factors that may affect their finances in the long term.
Author: Eve Becker
Eve is a professional writer for Technical Writers and uses her experience in the finance industry to expand upon business related topics. She has a first class degree in Business Management and runs her own business related to personal development.