Figures released on 15.09.2015 have revealed that inflation has hit zero after a fall in petrol and food prices,. According to the ONS, company insolvencies for the 2nd quarter of 2015 in England and Wales decreased and were at the lowest level since the 4th quarter of 2007. Regardless of this, it is still important for SMEs to remain mindful of the effects of low inflation as even the smallest increase in the Consumer Price Index could affect the cost of production of goods and hurt capital expenditure.
On the whole, controlled inflation is seen as healthy stimulus for the economy however it can prove somewhat difficult to moderate and supervise. The Government’s target inflation rate is still set at 2% and if inflation reaches higher than this figure the value of the pound can decrease affecting both individuals and businesses.
Generally speaking, larger corporations are in a much better position to handle inflation as they are often able to combat its effects via savings generated by economies of scale. Small firms however, who do not have the revenue or capacity to purchase goods in high quantities often take a direct hit on margin, driving costs and therefore prices up.
High inflation can also cause a slump due to its negative effect on exchange rates. This is often an unexpected by small businesses as high UK pricing means that the goods and services are not competitive globally.
It is also important for SME directors to be mindful of the increase in basic wages that has now come into play as a result of the summer Budget. The introduction of the National Living Wage will undoubtedly push the expenditure bill up for many small to medium sized organisations.
According to accountancy group UHY Hacker Young, one of the ways that SMEs can help guard against the effects of inflation is to keep an eye on their business banking facilities.
Mark Giddens, head of private client services at UHY Hacker Young, says: “Businesses just aren’t getting a good deal from their banks. In order to ensure they are making the best out of the bad situation, businesses need to be proactive and shop around for accounts and other products that offer the best interest rate possible.
However, as long as inflation rates remain steady, and the economy continues to recover, SMEs should find growth unimpeded.