Inflation stays at 3.8 per cent: Is this good or bad for businesses?

For the second consecutive month, inflation in the UK has stayed at 3.8 per cent which effectively means general costs have stayed at the same price.

However, while inflation remaining steady is a positive thing, it remains above the Bank of England’s two per cent target and there is very little sign of that changing any time soon.

There are different ways of looking at the latest inflation figures, given that it has stayed the same.

It’s good for ongoing business costs but bad in terms of revenue and profits as it paints a disappointing picture of the UK’s economy.

This will also determine what the Bank of England does with interest rates and it’s been confirmed that interest rates will stay at four per cent.

What does inflation staying at the same rate mean?

With inflation remaining steady, general costs for taxpayers and businesses will have remained consistent with little change.

The only exception to this is food prices which do continue to rise at a sharp pace, rising for a fifth consecutive month.

For businesses, inflation staying at the same rate will have some positives in that costs will remain steady, meaning they won’t be losing more money each month.

However, the UK’s inflation rate remaining unchanged for the second consecutive month highlights how stagnant the economy is.

This is backed by recent figures which confirm the UK’s economy didn’t grow in July.

Will the inflation rate affect the Bank of England’s interest rate plans?

Changes, or in this case no change to the UK’s inflation rate do influence the Bank of England’s decision making.

Despite rising to 3.8 per cent in July, the Bank of England decided to cut interest rates to four per cent in August, meaning the cost of borrowing for things such as mortgages and credit cards was cheaper.

However, with inflation holding at 3.8 per cent during August, the Bank of England has decided to keep interest rates at four per cent, meaning the cost of borrowing for both taxpayers and businesses will remain at a similar level.

The Bank of England must meet its target of two per cent by increasing or decreasing the interest rate to try and drive inflation down which in itself is easier said than done.

With inflation and interest rates staying the same, businesses wouldn’t see a change in things such as operating costs, which is a positive thing but at the same time, they may see very little improvement in revenue and profit figures.

How can I prepare for any inflation or interest rate changes?

While the lack of movement on inflation is good, it remains high and with interest rates above the Bank of England’s target, the best approach to managing higher costs is understanding your business’s current financial position.

Understanding your company’s incomings, expenditures, revenue and profits can help you put an effective plan in place to mitigate any changes to both inflation and interest rates.

Contact our experienced team of financial advisors to build a clear picture of your company’s finances.