Last week, it was reported that inflation in the UK rose by 3% in the 12 months to January. This is a 1% higher than the Bank of England’s target of 2%.
The Bank of England moves interest rates up and down to manage inflation. If interest rates are too high for too long, spending decreases and inflation drops, if interest rates drop and spending increases, this drives inflation up.
The problem is, this rise and fall in spending has to be carefully balanced. Too little spending and the country is at risk of recession, too much and inflation gets harder to manage.
Recently, the Bank of England cut interest rates for the third time to 4.5%, down 0.25% from the previous number to drive up spending again. However this recent rise raises questions about what happens next.
What is Inflation?
Inflation is the rate at which prices for items and services rise over time. If inflation increases too quickly, people’s salaries can’t keep up with the costs.
For example, say you buy a dairy milk bar for £1 in 2024 and the price rises to £1.10 in 2025. That would mean a 10% inflation on the price of dairy milks.
What that means in real terms, is that you need 10% more income to cover the rise in costs – which is a big jump.
In the UK, the rate of inflation is measured by the Office for National Statistics (ONS), which tracks the prices of everyday items like food and petrol to work out inflation rates.
How Does A Rise in Inflation Affect Businesses?
A rise in inflation not only affects consumers, but businesses too. This is because:
Materials become more expensive: Inflation makes both goods and services more expensive, which means the cost of creating products and managing operations rises. This can have a negative effect on profits, especially for small businesses.
Employees needing higher salaries: As the cost of living goes up, employees want to earn more to keep up with it. Small businesses might find it hard to retain talent because of this.
Consumers have less money to spend: If businesses are selling products, consumers might have less money to spend. This could impact profits and income for the business, making it hard to combat those rising costs.
To find out more about how this rise in inflation can impact businesses, we asked the experts.
Our Experts
- Douglas Grant, Group CEO of Manx Financial Group
- Sabrina Stocker, Founder and CEO at Two Comma PR
- Stephen Deadmon, Associate Partner, Growth and Innovation at Sia
- Andreas Adamides, CEO of Helm
Douglas Grant, Group CEO of Manx Financial Group
“The rise in UK inflation intensifies business financial strain and deepens investment uncertainty. As the economy nears recession, ongoing cost pressures – fuelled by high input prices and geopolitical factors like trade tariffs – are squeezing margins and dampening consumer spending. This growing investment hesitancy underscores the urgent need for adaptable lending strategies. UK businesses must rethink their financial approaches to bolster stability and resilience. Regular budget reviews, agile supply chains, and bulk purchase discounts can mitigate rising costs, while adopting new technologies and streamlining operations will enhance productivity and efficiency.
“Research from Manx Financial Group shows that nearly a third of UK SMEs have paused or scaled back operations due to financial constraints, a slight improvement from 40% last year. However, challenges remain, with 10% of SMEs still facing difficulty accessing external financing. This highlights the need for a more stable, inclusive lending environment. With the SME lending landscape evolving, the Labour Government must implement targeted solutions to improve credit availability, address inflationary pressures, and foster collaboration between traditional and alternative lenders. To date, the Government’s growth ambitions have yet to translate into legislation that improves access to financing, leaving both traditional and alternative lenders crucial to recovery in the face of rising taxes, geopolitical tensions, and cost-of-living pressures.”
Sabrina Stocker, Founder and CEO, Two Comma PR
“Just like moths silently damaging a fine cashmere sweater, inflation can stealthily erode profits. In these challenging times, SMEs must meticulously monitor their financial health to avoid unsightly outcomes.
“With inflation persistently rising, akin to how a tailor would scrutinize a garment for moth holes, business owners need to inspect their day-to-day finances more closely. This practice goes beyond identifying current issues; it involves forecasting potential vulnerabilities before they morph into significant threats. Astute entrepreneurs leverage these insights to adapt, whether by renegotiating supplier contracts, tweaking pricing strategies, or reshaping their business models to remain agile in a fluctuating economy.
“The covert impact of inflation demands a proactive strategy, much like how preventative measures shield garments from moths. Forward-thinking approaches can protect businesses from the erosive effects of inflation. This might entail investing in technology to bolster operational efficiencies, which can counterbalance escalating costs elsewhere. It also calls for nurturing a culture of continuous improvement and innovation within teams, ensuring alignment and readiness to navigate economic uncertainties effectively.”
Stephen Deadmon, Associate Partner, Growth and Innovation at Sia
“The latest inflation figures present a challenging scenario for UK businesses, with rising costs and uncertain monetary policy shaping the economic backdrop. Inflation has now reached 3%, exceeding expectations and the Bank of England’s target, making it increasingly unlikely that interest rates will be cut in the near future. For businesses, this means that the cost of borrowing will remain high, affecting investment decisions, expansion plans, and overall financial planning.”
“At the same time, wage growth continues to outpace inflation, increasing by 5.9% annually (excluding bonuses). While this provides workers with more disposable income, it also puts pressure on businesses to keep up with rising labor costs. Many companies, particularly in sectors with tight margins, may be forced to raise prices to offset these higher wages. This, in turn, could contribute to further inflation, creating a cycle that makes it harder for policymakers to justify easing monetary policy.”
“For businesses relying on credit or looking to expand, this environment presents significant challenges. Higher borrowing costs could delay investment in new projects, hiring, and technology upgrades. Retailers and consumer-facing industries might benefit from stronger wages driving spending, but they will also need to navigate increased operational costs. Meanwhile, exporters could face headwinds if persistent inflation keeps the pound volatile and impacts global competitiveness.”
“Innovation will become much more critical for businesses in finding new ways to improve efficiency, reduce high labour costs and improve productivity. We are likely to see more investment in automation and AI-driven solutions to offset these inflationary effects, To remain competitive in a higher inflation period, unlocking cash savings will be key to funding any new growth projects whilst borrowing costs remain high and budgets tight.”
“B2C businesses will also be forced to react to changing consumer behaviours driven by higher-costs. Lower disposable income will likely make consumers more selective and price-conscious, forcing retail and hospitality businesses in particular to innovate their product offerings, business models and pricing strategies to win out. We’re likely to see AI play a big role here, helping to quickly iterate new products, marketing strategies and implement dynamic pricing.”
“Whilst larger corporates are more easily able to weather the storm, it will be smaller SMEs and start-ups that will suffer the most. Investment, particularly from venture capital and private equity, will become more selective and likely lead to a slowdown in the development of new products and services. Smaller businesses will have to be more innovative in how they raise investment to counter this”
“Mult-national businesses with significant international operations, especially those in regions where inflation is perhaps not as high, will suffer disproportionately and will have to adopt market-specific efficiency programmes and new pricing strategies to remain competitive.”
“Ultimately, UK businesses will need to adopt a cautious approach, focusing on efficiency, cost control and strategic investment. The likelihood of prolonged higher interest rates means that financial resilience will be key, with firms needing to plan for sustained economic uncertainty and inflationary pressures well into 2025.”
Andreas Adamides, CEO of Helm
“UK businesses are navigating a storm of rising inflation and misguided ‘pro-growth’ policies. Surging costs aren’t just squeezing margins—they’re reshaping the very playbook for scaling in the UK.
“Supply chain expenses have soared, and businesses locked into last year’s supplier contracts now face painful renewals. Many must either absorb higher costs or pass them on to customers, testing consumer tolerance
“Labour costs have skyrocketed, forcing retailers, hospitality firms, and service providers to cut shifts, reduce headcounts, or turn to automation. Some are even relocating operations to lower-cost countries in a bid to survive.
“Meanwhile, inflation-driven interest rate hikes have made borrowing an expensive gamble, stalling expansion, tightening cash flow, and leaving founders with tough refinancing decisions at unattractive terms.
“In short, businesses are under siege. Those who adapt—by refining pricing strategies, reworking supply chains, and streamlining operations—will stay ahead. Those who don’t will struggle to stay afloat.
“Tough markets don’t kill great businesses—standing still does.”
