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Inflation has smashed through three per cent while growth forecasts for the next two years have been downgraded. Brian Farthing, senior economist at PricewaterhouseCoopers, explains what it all means for small and medium-sized enterprises (SMEs).

Businesses are being faced with rapid rises in input prices, whether that’s raw materials, petrol, or even food. The decline of the pound against the euro has increased the pressure.

There are two ways to deal with this situation: companies can squeeze their own margins, or try to pass price rises on to consumers. Until now, they have generally done the former, but that can’t go on forever and now they are having to pass price rises on.

The problem is that in a slowing ecomony, there’s a limit to the level of price rises consumers will take. Items like rent, food and debt repayments have all been increasing fast, squeezing households’ non-discretionary expenditure, and employment growth has been slow.

Lucky for some
Rising inflation creates a lot of losers, but there are also some winners. If you can be more efficient than your competitors, or if you have built up a larger war chest during the good years, you may now be in a position to win business from your competitors as they are forced to put up prices.

Our outlook is for consumer price inflation (CPI) to remain very close to three per cent in the next few months. But we expect it to head back to the “comfort zone” of nearer two per cent later in the year. Rising inflation has been caused in part by rising commodity prices, and we don’t expect those to continue escalating at the current rate for long.

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