“The rising costs of living look likely to place significant challenges on our business”

It’s evident in the tuts of drivers as they pass petrol stations, mentally comparing prices. Home owners and renters nervously watching their smart meters, as the numbers tick up faster than they had just a few weeks ago. And in the supermarkets, as shoppers swap their usual family shop for more budget-friendly alternatives.

Rising inflation, energy prices, and global events, are set to create a “cost of living squeeze” in the UK for individuals and businesses.

The Office for Budget Responsibility shared at the end of March that public finances emerged from the pandemic “in better shape than expected,” but warned that the invasion of Ukraine “will push inflation to a 40-year high of almost 9%, and living standards are set for a historic fall over the next 12 months.” 

Rising pressures

The Federation of Small Businesses (FSB) has warned of the potential impact of rising cost pressures on small businesses and sole traders, along with new administration requirements introduced in April. 

The end of March marked a deadline to pay all VAT deferred in the period up to June 2020 as part of the COVID-19 relief measures. Meanwhile 1 April saw the requirement to make VAT returns Making Tax Digital compliant, along with an increase in National Living Wage for employees over the age of 23, and a reduction to the 66% business rates discount for High Street businesses.

From 6 April, National Insurance Contributions for employers, employees and sole traders saw a 1.25 percentage point increase.

There’s no use hiding from the facts: this April flashpoint will push some firms to the brink

National chair for the federation, Martin McTague, commented: “These remain incredibly testing times for the small business and sole trader community,” adding that, though measures introduced by the Chancellor of the Exchequer would help to ease the changes, “There’s no use hiding from the facts: this April flashpoint will push some firms to the brink.”

The surge in energy prices is causing “huge anxiety,” he pointed out, telling OT that small businesses do not benefit from consumer protections, and do not have the negotiating power of larger companies as energy customers.

The rising infection rates is also anticipated to create “challenging” situations for businesses, the organisation said. Alongside the Trades Union Congress, the FSB has urged the Government to launch a permanent sick pay rebate, covering all absences.

McTague explained: “The cost of workplace absence, including finding cover, surpassed £3500 last year for the average small employer, meaning a collective £5bn cost to the small business community as a whole.”

New measures - what do they mean for businesses?

As part of the Spring Statement, Chancellor Rishi Sunak revealed plans to increase Employment Allowance – which cuts National Insurance for small businesses – to £5000, also introducing a temporary business rates discount for retail, hospitality and leisure businesses. 

Organisations representing businesses welcomed the measures, but suggested these would only be a limited help to businesses facing rising costs.

The Resolution Foundation, an independent think tank focused on improving living standards for those on low to middle incomes, shared that the economy had seen a strong recovery following the pandemic. The economy is now 0.5% larger than expected in October.

Putting the Spring Statement into context, the foundation highlighted that, despite the improvement in the economy, inflation is “surging.” Taking into account the measures introduced by the Chancellor, the organisation predicted: “the typical working-age household faces an income fall of 4%, or £1100, in 2022 – 2023.”

AOP Councillor, Tushar Majithia, optometrist and director of Lunettes Opticians, shared: “The rising costs of living look likely to place significant challenges on our business over the coming months and years.”

The measures introduced in the Chancellor’s Spring Statement will only be a small help for employees, he said, explaining: “We will be expected to increase our wages to support our employees who are all facing unprecedented rises in household bills. However, it will be difficult to match wage increase to the levels of inflation that we are currently seeing.”

For the practice, the increase in Employment Allowance to £5000 and business rate discounts, are welcome measures to help with the increasing costs.

The question of increasing prices

Majithia highlighted that the practice will aim to keep any increase in costs and services to patients to a minimum, though acknowledged, “there will inevitably have to be some increases.”

And it seems that more businesses are predicting a need to raise prices.

The British Chambers of Commerce found in its first Quarterly Economic Survey for 2022, increasing concerns from businesses about inflation and interest rates, while 62% of firms expect their prices to rise in the next three months – a record figure for this metric.

Director general of the British Chambers of Commerce, Shevaun Haviland, said: “The level of inflationary pressures has soared to record levels and we are now truly in uncharted territory.

“Firms cite cost increases coming at them from all angles,” Haviland continued, and emphasised that a crisis in the costs of doing business is “squeezing firms’ finances, driving further increases in prices and directly fuelling the cost-of-living crisis.”

Sharing his concerns with OT, Majithia explained: “At a time when we are looking to emerge from the pandemic and return to business as usual, with the rising cost of living and the uncertainties of the war in Ukraine, the biggest fear as a business owner is the negative impact on consumer sentiment.”

The biggest fear as a business owner is the negative impact on consumer sentiment

Consumer views: tightening the belt

The forecast for consumer sentiment, and spending intentions, is foreboding.

Speaking to OT, the FSB’s McTage felt that the outlook for High Street businesses “is tinged with pessimism,” between “plunging” consumer confidence and National Insurance increases, which will further restrict spending power.

Discussing what this could mean for High Street businesses, particularly practices, McTague explained: “The cost of living squeeze will have implications for small businesses as well as for people’s household budgets. Discretionary spending will take a hit, and even necessary purchases may be delayed for as long as possible, as people cut back in order to try and keep on top of their bills.”

The rising costs are likely to “keep consumer sentiment firmly in the negative zone,” he warned, and “record fuel prices are certainly not helping either, causing people to cut back on shopping trips, and forcing businesses to raise prices as their delivery and distribution costs increase.”

Similarly, the Resolution Foundation had already predicted that living standards for the coming financial year would be “bleak.”

However, its annual Living Standards Outlook forecasts that the invasion of Ukraine could further push up energy prices and wider inflation to over 8% in the spring, seeing typical household incomes across Britain fall by 4% in the coming financial year: “the sharpest fall since the mid-1970s.”

Speaking to OT about the situation, Adam Corlett, principal economist at the Resolution Foundation, said: “Britain has stepped out of a global pandemic, and straight into a cost of living crisis.”

The increasing prices of energy and other goods and services, Corlett said, is likely to “worsen the squeeze on incomes that families across Britain are facing.

“Inflation may even exceed the peak seen during the early 1990s, and household incomes are set for falls not seen outside of recessions,” he revealed.

Asked what this could mean for household resources and spending, Corlett suggested: “Rising prices across the board will put pressure on millions of low and middle-income families to tighten their spending, against a backdrop of weak wage growth which is unlikely to improve substantially over the coming months.”

If the situation follows the current trajectory, the organisation believes typical household income in 2025 – 2026 could be lower than it was in the midst of the pandemic.

“For many, this inflation-driven squeeze will be made worse by a living standards rollercoaster,” Corlett continued.

Researchers are already seeing a change in consumer spending. PwC’s Consumer Sentiment Survey for spring 2022, has recorded a “significant and sustained drop-off in consumer sentiment” that is suggests has led to the “biggest one-year decline in confidence since the global financial crisis.” 

Sentiment peaked in March 2021, recovering from the nationwide lockdowns, but has “steadily slid away.”

Researchers found that “consumers have started to feel the pinch of inflation… and are expecting worse,” with three quarters reporting that they have seen their grocery shopping become more expensive in the past few months.

Looking at what consumers intend to spend money on, PwC found that groceries are now “the only category with a net positive spending intention; almost exclusively a result of inflation expectations.”

This is above categories including: children and babies, home improvements, holidays, health and wellbeing, clothing and accessories, amongst others such as technology and eating out.

Offering advice for how businesses can tackle the challenging situation, PwC highlighted that businesses that “not only acknowledge that people are feeling the pinch, but offer ways to help them mitigate the challenges,” are more likely to retain the loyalty of their consumer base.

Suggestions included providing customers the opportunity to “trade down” through special offers and alternative brands, or reorienting their target markets towards consumer groups less negatively affected by the rising costs.

The organisation encouraged businesses to take action – revisiting budget expectations for their year, managing stakeholder expectations, and taking proactive measures.