Inflation can occur when prices rise due to an increase in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
A large portion of the population has never experienced inflation. With issues in global supply chains persisting, that is likely to change, and prices are set to go up. The UK has experienced an unprecedented period of stable prices. You have to go back to the late 1980s to find an extended period of inflation. Back then, inflation reached more than 14% and eventually declined to average only 3.5% later.
Since then, it’s been around 2%. That is, until now. Supply shocks, primarily due to the Covid-19 pandemic and Brexit, have led to higher prices in a large range of areas, including fuel and energy, along with more expensive goods such as cars and electronics.
The cost of living surged by 4.2% in October 2021, which is the highest rate in almost 10 years. Not only that, but the Bank of England has said it expects the Consumer Prices Index (CPI) to peak at 7.25% in early 2022 (It has currently reached 5.5%).
Price inflation can make planning and investment decisions more difficult. At a macro-level, it can be linked to a recessionary economy that causes consumer spending to plummet. In some extreme cases, high inflation can lead companies to hold onto their stocks longer, hoping to achieve higher prices tomorrow.
Our advice
At SAS, we advise our clients to monitor cash flow and operating costs, which may have knock-on effects for some practical things, such as order patterns for materials. It is also prudent to consider the impact that rising interest rates may have on borrowing costs, with many commercial loans bearing interest at a given percentage over the base rate.
Clients must maintain an ongoing business plan, carrying out scenario planning exercises, and budgeting to understand the changing situation.
For more information and advice, please contact a member of Team SAS
