Inflation fell 1.7% up to September - but is this enough to bring back business confidence?
16 October 2024, 14:35 | Updated: 16 October 2024, 14:37
The UK finally appears to be exiting its four-year long ordeal with high inflation.
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Today’s inflation data coming in lower than expected at 1.7% will be welcomed by businesses and consumers alike, not only because of more stable prices, but the increased likelihood of further interest rate cuts from the Bank of England.
Research from the British Chambers of Commerce has shown clearly the impacts of high inflation over recent years.
Our business surveys were among the first to show a major spike in expected price rises back in 2020, at a time when the consensus was that inflation would be ‘transitory’. This was primarily driven by the damage done to global supply chains as a result of Covid lockdowns, with shipping container costs jumping by 700% in some cases.
New trade barriers with the EU in 2021 and an energy price crisis in 2022 compounded the situation further.
Between 2020 and 2023, inflation became the dominant factor impacting most SMEs as they struggled to absorb costs.
In 2022, at the height of the inflation crisis, 84% of firms told us this was their primary concern - the highest result in the history of our data - with hospitality, manufacturing, and retail firms bearing the brunt more than most.
One business told us, “increases in prices have affected cash flow and we are having to borrow more finance. If we don’t get the finance, my business will fold”.
The subsequent increases in the interest rate thus came as a major blow for those firms in survival mode.
However, as inflation ebbed throughout 2023, so too did concern among businesses. This has also been one of the main reasons for the increased business confidence and optimism we see in our data.
The easing of inflation has paved the way for a clearer path for interest rate reductions, which have come as a major relief to many firms and today’s data makes that even more likely.
However, there are still causes for concern. Core inflation remains stubborn and owner occupier housing costs are in fact continuing to rise. The major escalation in the Middle East could also feed into higher energy costs over winter.
One of the long-term impacts of this has been on investment. Currently, we see from our surveys that most SMEs are not increasing their investment spend due to inflation and economic uncertainty.
New concerns have now overtaken inflation, namely taxation, as anxiety levels among businesses rise ahead of the Autumn Budget.
It is vital to not let the rising business optimism go to waste. A clear Industrial Strategy - built in consultation with businesses to boost investment - will go a long way to allay fears.
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David Bharier is the Head of Research at British Chambers of Commerce.
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