22 Aug 2023
3 minutes

Understanding the inflation crisis: The effects on UK businesses in 2024

UK inflation 2023: a guide for businesses
Quick summary

Inflation is a critical economic phenomenon that significantly impacts people, businesses, and the UK economy. In recent times, inflation has been low, and interest rates largely static. However, 2023 saw a notable inflation crisis that left many businesses grappling with rising costs, changing consumer behaviour, and economic uncertainty.

Table of Contents

    But why is high inflation bad for businesses, and how can they make sense of new inflationary pressures that haven’t been seen for over ten years?

    Nine of the biggest factors shaping the ongoing inflation crisis

    In this article, we explore why inflation is such a challenge for businesses and provide a guide to help navigate an increasingly complex landscape.
    Here’s a rundown of things we’ll discuss:

    • The global economic context
    • The Great Resignation
    • Supply chain disruptions and rising costs
    • The war in Ukraine
    • Changing buyer behaviour and how to respond
    • Manage pricing strategies
    • Implement proactive risk management
    • Capitalise on opportunities
    • Summary: Inflation in a dynamic world

    How to enhance spend visibility and control with Payhawk

    The global economic context

    Trying to get your head around the 2023/24 UK inflation crisis? Considering the broader global economic context and the interconnection of inflation and the business cycle is essential.

    Firstly, businesses need an effective inflation definition, so they can start to make sense of the impacts they may see. For this article, we're taking inflation as 'the general increase in prices either across an individual sector or the economy as a whole.'

    Undoubtedly, a key driver has been the COVID-19 pandemic and subsequent fallout, with 72% of businesses reporting supply chain impacts. Shortages of critical supplies such as steel, computer chips, and raw materials have also meant increasing prices.

    Naturally, the war in Ukraine has massively disrupted supply chains too.

    And there is, of course, one inflationary effect unique to UK businesses: the ongoing effect of Brexit. While other Eurozone countries have experienced inflation, it's fair to say that the UK has suffered more than most.

    Other factors, such as increased government spending, endemic supply chain disruptions, and changing consumer demand patterns, have significantly driven inflationary pressures across various sectors.

    Understanding these global dynamics is crucial to make sense of inflation's impact on businesses, enabling them to make informed decisions and effectively respond to the challenges posed by rising costs.

    How to support spend control in a volatile market

    The Great Resignation

    COVID-19 had a further, more fundamental, and long-lasting effect, The Great Resignation.

    A massive amount of global research shows that workers in Western economies almost universally carried out an appraisal of their lifestyles, and many simply never returned to the workforce. Others chose to change careers, work fewer hours, or radically shift their approach.

    The UK economy heavily depends on foreign workers, and we saw many head home during COVID, never to return.

    While all of these may have led to a happier workforce, they have likely also contributed to inflationary pressure as more employers compete for fewer workers.

    Supply chain disruptions and rising costs

    Supply chain disruptions have significantly contributed to the inflation crisis of 2023 and into 2024. The COVID-19 pandemic, trade tensions, and natural disasters have disrupted global supply chains, leading to critical raw materials, components, and finished goods shortages.

    As a result, businesses face higher input costs and increased transportation expenses, which ultimately get passed on to consumers. Understanding these supply chain dynamics is vital for companies to assess their cost structures and explore alternative sourcing options.

    The war in Ukraine

    From a UK perspective, if we want to understand the impact of inflation on business, we need to look at the effects of the Ukraine war.

    The UK was not hugely dependent upon the Russian supply of gas and petroleum products, but it had almost uniquely small reserves and storage capacity at the start of the war. This left the country vulnerable to price shocks as most supplies were bought on the forward market.

    Contrast the situation with Germany, which depended on Russian supplies but has now totally transformed its sourcing.

    Indeed as the UK Office for National Statistics points out, “The 12-month rate of energy price inflation in the UK was the highest among G7 economies in March 2023, which compares with single-digit energy price inflation in most major European economies and declining energy prices in US and Canada.”

    The war has also produced significant effects of inflation on international business food prices as Russia and Ukraine are significant producers of grain, which is exported worldwide.

    Changing buyer behaviour and how to respond

    Another aspect of the 2023 (and now 2024) inflation crisis is the changing buyer behaviour (both for businesses and consumers) influenced by economic uncertainties and rising prices.

    Buyers are becoming more cautious about spending, prioritising essential purchases, and seeking value for money.

    Businesses must adapt their marketing strategies, pricing models, and product offerings to meet evolving consumer preferences. Companies can maintain their competitive edge and effectively engage with price-sensitive consumers by understanding and responding to these shifts.

    Manage pricing strategies

    In an inflationary environment, businesses must carefully manage their pricing strategies. It’s crucial to balance maintaining profitability and avoiding price shocks that may drive customers away.

    Companies should analyse their cost structures almost daily, evaluate market demand, and consider both tactical and strategic pricing adjustments.

    Implementing dynamic pricing models, offering value-added services, and exploring alternative revenue streams can help mitigate the impact of rising costs on the bottom line.

    Implement proactive risk management

    Businesses must prioritise proactive risk management to navigate the ongoing inflation crisis successfully.

    Data-driven proactive risk management involves conducting scenario analyses, stress-testing financial models, and implementing effective cost-control measures.

    Companies should evaluate their supply chain vulnerabilities, explore hedging strategies for commodities, avoid single-thread risk, and assess the impact of inflation on their debt obligations.

    Who knows where the next shock will come from? But by taking a proactive approach to risk management, businesses can enhance their resilience and minimise the negative consequences of inflation.

    Capitalise on opportunities

    To inject a little balance, it’s worth saying that the impact of inflation on business isn’t solely negative, and amidst the challenges posed by the 2023 inflation crisis, there are also opportunities for businesses to explore.

    Inflation can stimulate innovation, drive market consolidation, and create demand for new products and services.

    Companies should stay attuned to changing market dynamics, identify emerging trends, and capitalise on new growth areas. By adapting their business models and leveraging these opportunities, businesses can position themselves for success despite inflationary pressures.

    Summary: inflation in a dynamic world

    UK inflation crisis has presented numerous challenges for businesses, requiring them to understand the global economic context, manage supply chain disruptions, adapt to changing consumer behaviour, and implement effective pricing and risk management strategies.

    What is inflation in business terms going to change? We can’t say where the next crisis will come from, but we know these so-called ‘Black Swan Events’ happen, and issues seem to be getting more and more frequent.

    By comprehensively understanding the factors driving inflation and proactively responding, businesses can navigate this challenging landscape and position themselves for resilience and growth.
    Scenario planning and dynamic appreciation of changing conditions can help immeasurably in this respect.

    At Payhawk, we help businesses manage corporate expenses with customisable card controls, real-time spend visibility, cost-saving low FX fees, smart cash flow control, corporate credit cards, and more.

    The ability to adapt, innovate, and make informed decisions will be crucial in managing the impact of inflation and ensuring long-term business success in 2024 and beyond. Book a demo to learn how Payhawk can help.

    Trish Toovey - Content Director at Payhawk - The financial system of tomorrow
    Trish Toovey
    Senior Content Manager

    Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.

    See all articles by Trish →
    15 Jul 2024


    15 Jul 2024


    15 Jul 2024