Procurement · 21 March 2017

Small business costs rising faster than UK inflation rate

Business costs
Escalating business costs have begun to impact on the profitability of small businesses

Business costs for owners of small UK companies have risen at a higher rate than national inflation, according to new research.

Latest figures from the Office for National Statistics (ONS) showed the consumer price index (CPI), the inflation rate used to calculate price increases for household goods and services, at 2.3 per cent for February 2017 – the highest level of CPI inflation since September 2013.

However, new research from Centre for Economics & Business Research (CEBR) found that business costs rose by 3.2 per cent over the last 12 months – faster than the rate of inflation for UK households.

The CEBR business costs index was calculated by monitoring price changes of 33 different “input” groups over the past year. The data points used range from physical goods and utilities to rent and employment costs.

Business rate hikes are also set to hit firms across Britain, with government revaluation in some towns even doubling the bills of some owners.

Despite escalating business costs from several directions, inflationary pressures remain a key worry for small business owners after significantly impacting the price of imports. As the pound continued to decrease in value after the EU referendum in June 2016, goods bought from overseas became more expensive.

In February, the Confederation of British Industries (CBI) revealed that the cost of labour, materials and overheads for UK manufacturers rose at the fastest rate since April 2011. In December it was reported that over 5,570 small restaurants relying on imported food from Europe were at risk of closure within the next three years.

“Today’s rise in CPI inflation will be a blow to hard working business owners who are going through an extreme period of uncertainty. Those sectors most exposed to physical input costs such as manufacturing and construction, will continue to be squeezed,” said Ian Rand, CEO for Barclays Business Banking.

Rand added that increased business costs would be handed down to consumers, as owners seek to balance the books.

“Inflationary pressures, coupled with the weak pound, will force [small business owners] to lift their prices in order to protect their profit margins. Rising factory gate prices will sustain ‘pipeline’ pressures on inflation, which is likely to see the headline rate increase further during 2017.”

In a recent study, over seven in ten owners of small firms believed that the “perfect storm” of rising business costs would damage their spending power and stall or shrink revenue for the rest of 2017.

The report, by insurer RSA, claimed that inflation alone could represent a £6.8bn bill for owners to manage.

“The business environment is expected to become much harsher in the coming year, and it’s crucial that businesses plan ahead to ensure that they are prepared,” warned RSA director Russell White.

Find out how greater efficiency could protect against rising small business costs

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ABOUT THE EXPERT

Simon Caldwell is deputy editor at Business Advice. He has a BA in politics and communications from the University of Liverpool, and has previously worked as a content editor in local government and the ecommerce industry.

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