With the recent announcement that the Government has met its pledge to halve inflation by 2024 – reaching 4.6 per cent weeks ahead of schedule – Milsted Langdon, one of the South West’s leading independent accountancy firms, has cautioned businesses of the need to plan ahead, as some face a ‘perfect storm’ of a slowdown in price growth, wage inflation and continually high-interest rates.
Consumer-facing markets with high labour-to-raw-materials ratios will be hardest hit, the experts have warned, with care and retail sectors being impacted, alongside transport and housing industries, where a high level of capital commitments is not currently an advantage.
The firm advised that, in these markets, the sharp fall in inflation is likely to “squeeze” profit margins as consumers expect slower price rises – compounded by a continued 7.7 per cent wage inflation and the spike in oil prices, which will lead to higher energy and transport costs.
Jon Stocker, General Practice Partner at Milsted Langdon, said, “Employees are seeking to recover lost ground, and are still struggling to pay for food, utility and mortgage bills.
“It is likely that wage inflation will start to fall soon but will lag behind the Consumer Price Index (CPI). The Government are driving wage inflation, increasing the National Minimum Wage to help meet the rising cost of living, with the last increase of 10 per cent at the lower end last year – meaning that all employees have an expectation of rising wages to keep differentials the same.”
At the same time, Jon cautioned that the fall in inflation may not be enough to quell the impact of long-term high interest rates – and that it’s having a significant impact on the ability for businesses to grow, invest and purchase new capital equipment.
He explained, “Interest inflation since the start of the crisis has skyrocketed. It’s particularly noticeable with clients making investment decisions for fixed assets, where previously interest costs didn’t really factor into the decision. Now it’s critical to the decision making.
“I have also seen a reduction in investment and clients tending to repair rather than invest in new capital equipment.”
Reflecting on how businesses can plan ahead and protect themselves against falling inflation, the firm urges restraint overspending and capital investment.
Jon continued, “Tight control of expenditure is important, particularly where working capital also includes proper management of debtors and stock levels as this is money tied up in the business, which is now expensive.
“If the cost of raw materials is falling or stabilising, it is better to keep stock levels to a minimum to take advantage of falling prices rather than selling expensive stock items at a lower margin.
“This is a very difficult time for businesses, even as inflation falls, and the cost of raw materials stabilises. The fall in inflation was a sharp one, meaning businesses will feel the pain in their profit margins as it becomes harder to increase prices whilst still having rising labour costs as individuals recover from a period of inflation that peaked at 11.1 per cent.
“For business owners who are struggling, we urge them to seek professional advice on managing the company finances, investments and planning for the future. We can help businesses to weather this storm and come out the other side, sailing smoothly.”
Pictured above: Jon Stocker, General Practice Partner at Milsted Langdon