Peaking at 11.1% in October 2022, the rate of inflation (the change in price for goods and services over time) was at a 40-year high last year. And needless to say, everyone – including those in the retail and eCommerce space – is getting pretty tired of it.
Experts and the Bank of England finally predict an end to the rise – and a drop in the inflation rate just around the corner.
That doesn’t mean prices will go down, but it will provide some welcome relief for us all in that costs will at least start to rise at a slower rate.
In this article, we look at how inflation got so high and how it impacts businesses. We’ll also cover the UK inflation forecast and consider when it might come down, and how this drop will impact retailers and their customers.
How did the UK inflation rate get so high?
The inflation seen at present is the highest since the 1980s, which followed a peak of over 23% in 1975. That hike was due to the spiralling price of oil, plus wages rising.
Barring a catastrophe, we won’t see those levels of inflation again for some time. But that doesn’t mean the current situation isn’t concerning.
The start of the rise can be traced back to the end of lockdowns following the coronavirus pandemic.
This saw many consumers start to spend the money they had saved while being told to stay at home, meaning there was a surge in demand that companies struggled to meet.
Additionally, following Russia’s invasion of Ukraine, energy prices soared, further contributing to inflationary pressures.
In the UK, the Consumer Prices Index reached its peak at 11.1% in October 2022, before gradually declining to 8.7% in April and remaining static in May this year – both figures were worse than the expectations of economists and the Bank of England.
As a result, inflation expectations have remained consistently higher than the Bank of England’s targeted rate of 2%.
Ruth Gregory, deputy chief UK economist at macroeconomic forecasts consultancy Capital Economics, told Reuters News Agency the UK has seen inflation rise further and “stay higher than elsewhere”.
That’s because, coupled with the energy crisis, labour shortages brought on in part by Brexit have caused the country to experience “the worst of both worlds”.
How does inflation affect businesses?
Inflation can have significant implications for businesses. Here’s how it affects them:
1. Cost of inputs
Inflation drives up the prices of raw materials, energy, and labour, increasing production costs for businesses. This can squeeze profit margins unless businesses can pass on these higher costs to consumers through price adjustments.
2. Pricing decisions
Inflation forces businesses to carefully consider their pricing strategies. They may need to raise prices to maintain profitability in the face of rising costs. However, higher prices can impact consumer demand and competitiveness, requiring businesses to strike a delicate balance.
3. Consumer purchasing power
Inflation erodes consumers’ purchasing power, potentially dampening demand for non-essential goods and services. Businesses that are reliant on consumer spending may experience reduced sales if consumers cut back on discretionary purchases.
4. Interest rates and borrowing costs
Inflation influences interest rates set by central banks. Higher inflation may lead to increased borrowing costs for businesses, making it more expensive to finance investments, expansions, or working capital.
5. Wage pressures
Inflation can drive demands for higher wages from employees to cope with rising living costs. This can increase labour costs for businesses, requiring careful management to balance these rises with productivity and profitability.
6. Uncertainty and planning
High or volatile inflation introduces uncertainty, making it challenging for businesses to forecast costs, revenues, and market conditions. This can impact their ability to make informed decisions and plan for the future.
Businesses must actively monitor and manage the effects of inflation on costs, pricing strategies, consumer demand, borrowing costs, and overall operations. This is crucial to ensure long-term viability and success.
Is inflation expected to come down – and when?
The Bank of England said in May that it anticipates a fast decline in inflation over the coming year, for several reasons.
Firstly, the huge decrease in wholesale energy prices is expected to have a positive impact on reducing inflation. The Bank says that while households and businesses may not have seen their bills change just yet, this will in time contribute to the overall fall in prices.
Secondly, a notable decrease in the cost of imported goods is anticipated. This is due to a potential easing of production challenges faced by businesses. As these difficulties begin to disappear, the prices of imported goods are likely to decline.
Thirdly, with reduced disposable income, a decrease in the demand for goods and services is expected. That will prevent a rapid increase in prices for various products and services. In turn, that should lead to a slower rate of price escalation compared to previous months.
The Bank continued by saying that there are indications that inflation may have reached a turning point. It stopped rising around the middle of 2022, and has remained relatively stable since then. The expectation is that inflation will begin a significant decline very soon.. However, it is essential to ensure that it not only decreases but also remains low.
All in all, the Bank hopes to see it fall to around 5% by the start of 2024, before dropping further to 2% by the end of next year.
How does inflation dropping affect the retail industry?
There are several practical ways that inflation dropping will impact merchants and customers:
1. Increased purchasing power and affordability for consumers
Falling inflation allows consumers to stretch their budgets further, as prices stabilise or decrease. This increased purchasing power allows consumers to afford a wider range of products and services – meaning higher sales volumes for retailers.
2. Controllable and stable staff wage costs for retailers
Falling inflation reduces pressure on retailers to provide significant wage increases. This stability in staff wage costs allows retailers to manage labour expenses more effectively, maintain profitability, and plan for business growth or investment in other areas.
3. Potential for increased investment, expansion, and business growth
When inflation rates decrease, retailers may have more financial resources for investment and expansion. The reduced inflationary pressures allow retailers to consider strategic investments such as technology upgrades, store renovations, or new product lines.
Implement a POS finance solution
Rising inflation and the ongoing cost of living crisis have no doubt impacted UK consumer spending. Brits have been tightening their purse strings as they try to make each pound go further. Even with a potential drop in inflation, prices remain high and consumers will still need support.
POS finance solutions can help retailers do just that, offering greater flexibility in how they pay. For example: DivideBuy’s interest free finance product lets customers spread the cost of items – helping to make purchases more affordable.
Implementing flexible finance is an essential step when creating your online store. It helps to reduce cart abandonment, increase basket size and boost sales.
In fact, by using our POS finance solution, UK retailers have seen an average increase in sales of 50%.
Book a demo today and unlock the benefits of POS finance.