Businesses Should Prepare Themselves for the High Level of Inflation

One of the greatest worries in the predicted difficult conditions of 2011 for both businesses and consumers is price inflation thanks in part to the increase in VAT from 17.5% to 20% from January 4 but also to the rise in commodity prices including basic foods and oil. 

Coupled with rising energy prices and public sector job cuts, this is expected to lead to a drop in consumer spending on non-essentials.

Businesses therefore need to protect themselves to ensure their survival and consider whether to concentrate on profits in the short term rather than longer term growth.

A high inflation rate makes it difficult for businesses to set prices. Normally when the inflation rate is climbing too quickly or remaining consistently high, interest rates will be increased in an attempt to bring it under control and eventually reduce it.

However, in an interconnected global economy, where most countries are subject to the same external pressures from such things as commodity price speculation on basic foods, speculation on futures in oil and minerals that are the raw materials used by manufacturers, it is being argued that this will not work now.

Financial engineering is being carried out well outside the influence of the government and beyond any attempts by the Bank of England to use interest rates to bring inflation down.  The question is whether in fact inflation is something to be worried about in current circumstances.

A UK business trading only in the UK will face a tougher time than a UK business focused on export, which can target the emerging BRICs with expanding middle classes that provide capacity for economic growth.

UK focused businesses in 2011 are therefore likely to be caught between a rock and a hard place and it may be that businesses should consider carrying out a thorough review to identify any cost savings they could make before the going gets any tougher.

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