Simply put, inflation is defined as a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in a national economy or even globally, as is our case at the moment. This affects both the private life of every citizen and businesses of any size. But, as the great financial experts say, any crisis is a unicorn business opportunity that appears every few decades.
According to the latest figures from the ONS (Office for National Statistics), inflation in the UK has risen to 9.1% this year, the highest level since 1982. The UK’s central Bank announced that this percentage could reach 11% later this year. In the United Kingdom, the responsibility for controlling the annual inflation rate and ensuring price stability rests strictly with the central bank, namely the Bank of England.
Inflation is measured by two main indices: the Retail Price Index (RPI) and the Consumer Price Index (CPI). The CPIH is calculated from around 180K price quotes for around 700 goods and services each month. The CPI measures the average month-to-month change in the prices of goods and services purchased by most households in the UK.
What is the main cause of inflation in the UK?
It is mistakenly believed that in the UK the inflation was generated by the lack of supply caused by the COVID-19 pandemic, along with strong consumer demand, driven by historically robust jobs and wages. If we remember, during the pandemic, governments around the world allocated significant budgets for a number of programs to help businesses survive the difficult conditions imposed by the health crisis. These financial programs were possible only through one measure: printing more money.
Does printing money cause inflation? Yes, the so-called “printing of money” by increasing the money supply causes inflationary pressures. As more money flows into the economy, it is more likely that economic growth will take place at the risk of destabilizing prices.
Some £ 500 billion was printed by the Bank of England during the pandemic and you can see below the chart of money printing in the UK in recent years. For more info charters about money supply please see the source.
That is why is so wrong to believe that inflation was generated by the increase in the price of petrol in the petrol stations or gas because these are just direct and immediate effects of inflation, respectively they are part of the economic crisis.
Can be UK inflation higher than other countries?
The UK is a net importer of energy, which means it is exposed to global price shocks. This means that other countries need to produce more energy than they need to meet the UK’s energy needs. But what happens during this crisis when these producing countries are struggling to produce electricity even for their own consumption?
The post-blockage rise in petrol and gas prices, exacerbated by Russia’s war in Ukraine, has sparked a global crisis that will primarily affect net energy-importing countries. The UK can be affected more than other countries by two main causes:
- It is a net importer of electricity
- Brexit is a major factor in the high and widening inflation gap between the United Kingdom and other European countries. Brexit is driving inflation higher in the UK than its European peers after identical supply shocks.
How to protect your business?
Here are some suggestions by which you can optimize the activity of your business and which could be useful in a period of economic crisis:
- Focus on productivity
A clear business plan is a blessing, and if you don’t have one you should. It’s the right time to focus on ways to do more with less, which are great ways to reduce costs.
- Automation, your reliable ally
Process automation is an increasingly used method today and fits very well with the demands of our time. There are a lot of applications that help you automate repetitive tasks, which helps you reduce errors, streamline processes, and improve customer service.
- Cut out unnecessary services or negotiate lower prices
Do you know the reference prices for each service that your business uses? It’s time to make a table with all the cost calculations from the operators. Then, if necessary, you can try to negotiate.
- Are you aware of your debts?
The UK central bank has begun adopting a strategy to raise interest rates to help fight inflation. Even if you can’t pay off your debt to the bank or line of credit in full, reducing the amount you pay by lowering interest rates can help protect your business from inflation. At the same time, you can discuss with your bank a possible renegotiation of loans to reduce interest rates.
- Recalculate the pricing strategy you practice
People will pay only what the market will bear. Therefore, it is vital for your business to practice a fair price for your services in line with the inflation period.
- Pay attention to your cash flow!
Organize yourself so that you have a clear view of the arrears you make, then keep track of unpaid bills and pending estimates to keep your business moving.
- Create backup supply chains
Trends during an economic crisis can influence how your business may be affected by supply chain vulnerabilities. Do you have excessive trust in unique suppliers?
- Create a human resources strategy to attract and retain talent
Because people are the best values you have in business and they will be with you if they feel protected and respected.
No matter how difficult it may be to deal with inflation, as an entrepreneur, it is a unique opportunity to learn how to make your services as efficient as possible. In general, inflation is expected to affect small and medium-sized businesses, but it is not a general rule. And remember one thing: nothing is eternal, everything moves and transforms itself! It’s called evolution.
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