Businesses Can Prepare Themselves to Survive the Problems Caused by the High Level of Inflation
Copyright (c) 2011 Alison Withers
It is generally acknowledged that UK businesses are likely to face difficult trading conditions throughout 2011 as economic recovery remains uncertain.
One of the biggest worries for both businesses and consumers is pprice inflation, partly thanks to the increase in VAT from 17.5% to 20% from January 4 but also to the rise in commodity prices including basic foods and oil. Coupled with rising energy prices and public sector job cuts, this is expected to lead to a drop in consumer spending on non-essentials.
Businesses therefore need to protect themselves to ensure their survival. This may mean having another look at their business model, with the help of a business adviser, and considering whether to concentrate on profits in the short term rather than longer term growth.
The latest recorded figure for the CPI (Consumer Price Index), which does not include energy and housing costs, was at 3.3% in November 2010, an increase month on month of 0.4% and higher than had been predicted. The target inflation rate to which the Bank of England is required to work is 2%.
The RPI (Retail Price Index - a different measure of inflation from the government's preferred measure of the CPI) was at 4.7% in November 2010, up from 4.5% in October.
A high inflation rate makes it difficult for businesses to set prices. Normally when the inflation rate is climbing too quickly above an acceptable level or remaining consistently high, interest rates will be increased in an attempt to bring it under control and eventually reduce it.
However, it is being argued that this will not work now that the global economy is so interconnected and the question being asked is whether in fact inflation is something to be worried about in current circumstances given that most countries are subject to the same external pressures.
The most obvious example of this is the commodity price speculation on basic foods that has been rampant since 2007-08. The same is true for speculation on futures in oil and perhaps also for a variety of minerals that are the raw materials used by manufacturers.
So financial engineering is being carried out well outside the influence of the government and beyond any attempts by the Bank of England to use interest rates to bring inflation down.
In fact the countinuing rise of the UK's CPI in November is attributed by the Office of National Statistics directly to the rising price of food, clothing and some household goods. It will be interesting to see whether the next set of figures is affected by the rapid rise in the cost of fuel.
In his recently published book, Beyond the Crash, former UK Prime Minister Gordon Brown argues that there is a pressing need for global financial regulation because we are now in a global economy, where countries are at different stages of economic development and therefore with differing capacities for growth.
A business in UK and trading only in the UK, a mature economy with an ageing population and little room for growth, will face a tougher time than a UK business focused on export, which can target the emerging BRICs (Brazil, Russia, India and China) with expanding middle classes that provide capacity for economic growth.
UK focused businesses in 2011 are therefore likely to be caught between a rock and a hard place. Those businesses that are affected by commodity prices will have a problem in covering increased production costs and are likely to find their profit margins squeezed and turnover reduced.
Raising interest rates in these circumstances will not be able to influence rising commodity prices but is likely to have a negative effect on both businesses and on consumers. It will add an extra burden of cost on businesses needing either overdraft or borrowing facilities from their banks. Equally, consumers will be affected by higher interest rates putting up the cost of mortgage repayments to consumers leaving them with less disposable income available for buying non essentials.
It will be a difficult balancing act for businesses in 2011 to decide how much of their increased production costs should be passed onto consumers, especially for those companies producing goods that are subject to the VAT increase, and it may be that businesses should consider bringing in a<a href="http://www.rescue.co.uk"> specialist business adviser to thoroughly review and identify any cost savings they could make before the going gets any tougher.
About the Author
Controlling UK inflation is unlikely to be achieved by the Bank of England raising interest rates, being fuelled by global influences outside its control. Ali Withers learns from Tony Groom, of K2 Business Rescue, that businesses will need to prepare themselves by revisiting their business model and focusing on profits, not growth, to survive. http://www.rescue.co.uk
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