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How will inflation rates effect SMEs?

How will inflation rates effect SMEs is one of the many fears that British business owners amid the current varied climate, now we are post Brexit and Covid.

In May 2023, the inflation rate peaked at 8.7% and to help challenge this the Bank of England raised interest rates for the 12th time to 4.5%. Core inflation, which excludes the price of energy, food, alcohol and tobacco has also risen to 7.1% which is a further rise from April.

This changes the culture of buyers from “get while the getting is good” which was happening only a couple of years ago to more cautious behaviour.

So while customers pause from shopping sprees, how do inflation rates affect the smooth runnings of British SMEs?

Inflation is like a pendulum swinging

How will inflation rates affect business owners who export overseas?

“One in ten UK SMEs exportsoverseas, which means they have significant foreign currency exposure and inflationcan have an important impact on this,” saysBarney Cotton, Senior Trader at Smart Currency Exchange.

At this current moment, low inflation rates are helpful for many SME operating in trade, as this aids in boosting a currency.

However, it can mean that exporting becomes more of a hassle as prices are typically higher for overseas buyers. Cotton continues to predict that if high inflation was to return the pound would plummet reversing the paradigm in overseas trade.

While overseas trade may not be a major concern for many small business owners in the UK are still struggling managing the changes required following, the UK leaving the European Union. This is despite the fact that Brexit has already caused a third of businesses a temporary loss in profitability.

The use of forward contracts has been a recommended move for many businesses in the trade sector. These industries feel inflation when it hits the most, so lockingA fixed exchange rate for a set period of time means that when the market inevitability moves their budget?won’t.

SMEs have less leverage than big competitors

Smaller businesses face adversity in times of economic uncertainty.

Neither smaller-scale enterprises nor major corporations will escape unscathed from the impending Brexit blowout. However, what pricing strategy specialists James Brown fears is that SMEs won’t think carefully about how to minimise the impact on their own costs nor manage their prices well enough to protect profits.

During times of economic uncertainty, the business sector becomes increasingly cutthroat. Brown says that businesses should watch out for any fixed price contracts they have with customers, especially as larger buyers try to negotiate out any clauses about automatic increases from inflation.

Who knows what’s next?

Who knows what’s next amid Brexit uncertainty?

The talks of an impending recession and the labour market coming to a screeching halt for the first time since 2017 are other factors that will undoubtedly affect the economic market.

It’s also important to remember that inflation affects different businesses in different ways. If we look back to 2015 when overall inflation was negative, physical goods fell in price by 1.6% while services went up 1.7%. It’s crucial for any business owner to be thinking about their own costs and prices regardless of the headline figure.

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