Dealing with Inflation in 2024 is an important and urgent issue for UK businesses. The increase in prices is a persistent and ever-present economic challenge that can significantly impact businesses, consumers, and the overall economy.
The UK, like many other countries, is facing the effects of inflation, but compared to our G7 colleagues, it's even more pronounced.
As a company owner, business leader, or entrepreneur, it's essential to be well-prepared, understand how to deal with inflation, and have a clear plan of action.
In this article, we’ll explore inflation implications for UK businesses and provide an actionable guide with our best tips to beat inflation and help you mitigate its adverse effects.
Inflation refers to the sustained increase in the general price level of goods and services over a period of time
When the headlines show a positive percentage rate, then prices are increasing. In the unusual event that an inflation rate is a negative number (deflation), then prices are reduced.
The above is an important point as often news outlets will say that inflation is decreasing, but that doesn’t mean that prices are lower, just that the rate at which they are going up is reducing.
Imagine a car accelerator. If you press it further, then the rate your speed increases is in turn increased. If you ease off the accelerator then you don’t go slower, you just increase your speed less.
Of course, this does beg the question: How does owning a business counter inflation?
And one of the big benefits of owning a business (rather than being employed) is that you have so many more options when it comes to ways to deal with inflation.
Now we understand inflation, you may be wondering: How does inflation affect business investment?
As inflation rises, the purchasing power of money decreases, leading to higher costs for businesses, increased prices for consumers, and overall economic instability.
Since 2008, the UK has had historically low inflation, but in recent years, inflation rates have been negatively affected by various factors, including changes in supply chain dynamics, global economic conditions, and government policies.
A broad surge in prices can have a widespread impact across all aspects of a company, influencing decision-making processes ranging from supplier selection to business investments.
The first step in understanding how to deal with inflation is to understand what the effects are likely to be.
Typically, businesses can expect the following effects from inflation:
Rising costs: As the price of raw materials, labour, and transportation increase, businesses face mounting cost pressures, impacting profit margins.
Reduced consumer spending: As the cost of living rises, consumers may cut back on discretionary spending, affecting industries that are heavily reliant on consumer demand.
Interest rates: To combat inflation, The Bank of England may raise interest rates, making borrowing more expensive for businesses seeking capital.
Uncertainty and investment: Inflation can create economic uncertainty, leading to reduced investment and expansion by businesses.
Wage demands: Inflation may trigger demands for higher wages from employees to maintain their purchasing power, further squeezing businesses.
Social unrest: As the effects of inflation bite, strikes, protests and disruption can appear, which will disrupt business operations.
All of these potential problems naturally lead owners and managers to wonder how to mitigate inflation risk in business.
Inflation Action Guide for UK Businesses: Ten ways to deal with inflation
Now we understand what inflation is and what effects we can expect, we can answer our main question: How do you deal with inflation?
There are a number of ways for UK businesses to deal with inflation. And these can be adjusted depending on what your company does, and your environment.
Here are our key steps to beat inflation:
Monitor Key Economic Indicators: Stay informed about inflation rates, interest rates, and other economic indicators to understand the current economic climate.
Keep an eye on the Bank of England monetary policy committee reports. As well as advising on the base interest rate, the committee reports on a wide variety of different factors that played a part in their decision.
Optimise supply chains: Diversify suppliers and negotiate contracts to minimise the impact of rising costs on raw materials and logistics.
Collaborate with suppliers to find ways to bring prices down or at least reduce any potential increases.
Review pricing strategies: Reevaluate your pricing strategies and carry out regular competition reviews.
Check the following:
Once you know what your market looks like then consider the feasibility of passing on increased costs to customers but make sure to communicate price adjustments transparently.
Control operating costs: Conduct a thorough cost analysis and identify areas where operational efficiency can be improved without compromising quality.
Sometimes it is easy for areas of inefficiency to creep in, so it’s a good idea to have a periodical review to make sure the business is as lean as possible.
Invest in technology: Automation and technology can streamline processes, reduce labour costs, and enhance productivity.
AI is making great strides in removing manual processes and giving customers a better experience, so it is worth taking a look at ways to use both Artificial Intelligence and Machine Learning to improve the business.
Strengthen customer relationships: Focus on building long-term customer relationships, as loyalty can help sustain sales during economic downturns.
Remember that customers will also be wondering how to deal with inflation, so creating a shared challenge will help with retention and strengthen the bonds with buyers.
Financial planning: Develop a robust financial plan that accounts for inflationary pressures and potential interest rate changes.
As we noted above, inflation has been historically low for a long time in the UK, so it’s important to have budgets and forecasts that give a complete picture of the challenge.
Employee training and retention: There’s no doubt that the UK has a general labour shortage which has increased staff movement and made it much more difficult to retain good people. This can lead to wage inflation as companies pay more to keep people in place.
However, research shows that investment in employee training and development not only improves retention but also enhances productivity.
Diversification: As inflation rises, markets may become price sensitive making it more difficult to make a profit.
Explore opportunities to diversify your product or service offerings to reduce reliance on a single market segment and reduce risk.
Collaborate with peers and share knowledge: Work collaboratively with other businesses in the same industry to identify shared challenges and potential solutions.
The above is especially useful where inflation makes it difficult to invest in machinery, research, or development. Here, a shared project can help to spread the cost and provide benefits for all parties.
Inflation present significant challenges for UK businesses in 2023 and continues to do so in 2024.
It’s clear that companies best placed to weather the financial storm are ones that spend time carefully planning and instituting proactive measures. And it’s clear that businesses can mitigate its impact and even find opportunities for growth amid economic uncertainty.
How are companies dealing with inflation? By closely monitoring economic indicators, optimising operations, and fostering strong customer and employee relationships, businesses can better navigate the inflationary landscape and position themselves for long-term success.
As a UK business leader or owner, it's crucial to remain adaptable and prepared to adjust strategies as the economic situation evolves. By staying informed and taking proactive steps, you can not only survive inflationary pressures but also emerge stronger in the face of adversity.
Want to learn more about navigatiing inflation? Check out our article: Top SMB tips to survive inflation in 2024.
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.