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The latest figures reveal that UK inflation fell slightly in December, down to 2.5% from 2.6% in November.
While the drop is marginal, however it has sparked discussion in the press as to whether this easing of inflation might prompt the Bank of England to consider cutting interest rates when it meets next month. However, there is also talk of many businesses raising prices over coming months due to payroll cost increases set for April.
Here, we explore some of the key issues you should be aware of.
Potential interest rate cuts: A relief for borrowers?
The fall in inflation raises hopes that further interest rate cuts may be on the horizon. If you already have a loan or are considering borrowing for expansion, a potential reduction in interest rates could lower financing costs and improve cash flow.
An interest rate cut does not necessarily have to have materialised before lenders reduce their rates. Confidence in the financial markets over future interest rate movements can work in your favour.
However, it’s important to remain cautious - any rate cuts are speculative at this stage and dependent on further economic data. The Bank of England have already demonstrated a cautious approach to reducing rates, and the inflation rate is still above their target of 2%.
You should prepare for multiple scenarios, and it may be an idea to seek advice so that you can best manage your business’ debt strategically.
Upcoming cost pressures in April
While lower inflation is welcome news, costs will still be rising in 2025. Payroll will particularly be affected.
The National Living Wage and National Minimum Wage are set to rise in April, which will directly impact payroll costs, particularly if your business is in the hospitality, retail, and care sectors.
In addition, as an employer, the increased Employer National Insurance Contributions rate and reduced threshold will add to your overall cost burden and further squeeze your profit margins.
If you are already grappling with thin margins, these increases could put a severe strain on your business. Now is the time to reassess your cost structures, consider your pricing strategy, improve efficiency, and explore ways to remain competitive.
What should business owners be thinking about?
1. Cash flow management: When costs are changing, understanding your cash flow is critical. Accurate forecasting will help ensure your business can meet its obligations while investing for the future.
2. Pricing strategy: Raising prices is one way to deal with increased costs. Passing costs on to customers is always a delicate balance, but strategic planning can minimise problems.
3. Efficiency improvements: Investing in technology or streamlining processes can help offset rising costs. For example, automation tools could reduce administrative expenses and improve productivity.
4. Workforce planning: You should plan for the financial impact of wage increases by knowing how much extra you are likely to pay. Reviewing your staffing levels may also identify areas where you could save money.
The fall in inflation is a positive development, but businesses cannot afford to become complacent. With wage increases and higher employer contributions on the horizon, planning and preparation are key.
If you need help with financial planning and cash flow forecasting, cost management and efficiency reviews, wage planning or tax and national insurance advice, please get in touch. By working with us, you’ll gain the insights and strategies needed to navigate these changes confidently and position your business for long-term success.
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