How is inflation affecting business, and how can trade credit insurance help?

In February 2024, we shared ‘UK businesses face ongoing economic pressure – Allianz Risk Barometer’ where we predicted inflation would decrease in 2024 compared to 2023:

“Thanks to softening demand and positive base effects on energy and food, we expect headline and core inflation should approach central bank targets by the summer in major economic regions. In the UK, inflation already reached the target in May, but will likely creep higher in coming months amid unfavourable base effects. It should normalize fully by Spring 2025.. Allianz forecasts UK inflation will fall from around 7% in 2023 to 2.6% this year, and 2.2% in 2025.”

Just before this, at the end of January 2024, the Bank of England Monetary Policy Committee (MPC) met and voted to maintain the bank rate at 5.25% for the foreseeable to help meet a 2% inflation target on a sustainable basis. This is the highest level for 16 years, but we expect the Bank of England (BoE) to start decreasing interest rates in August to gradually take them to 4.75% by year-end.  

According to the Office for National Statistics (ONS), the core consumer prices index, including owner occupiers’ housing costs (CPIH), was 2.8% in May 2024 – the lowest rate since January 2022. It was down from 3% in April 2024 and the recent 6.5% high in May 2023. The rate of inflation should continue to normalise and meet our predictions.

But how does inflation impact business?

Incentivised purchasing – If inflation is rising, buyers are encouraged to make a purchase right away to avoid delay and potential cost increases.

Masked price changes – When your prices have been static for a long time, and your competitors’ have too, a sudden increase is quite noticeable and could lead to customers taking their business elsewhere. However, an increased rate of inflation often leads to all companies being forced to adjust their prices, which hides any structural adjustment.

Hiring the best talent – With a rising cost of living, many people join the job market looking to increase their monthly income. If your business has the budget to grow your team, hiring at this time could provide you with a greater pool of high-quality candidates bringing new talent and skills into your organisation.

Higher margins – If you bought or manufactured stock in bulk and have a high inventory when inflation rises, you could up your prices and increase your profit margins beyond what was originally planned.

Reduced purchasing power – Inflation can reduce the purchasing power the average customer has, as more money is needed to buy the same items. For B2C companies, this can lead to lower levels of consumer spending i.e. longer sales journeys or even fewer purchases.

Rising material costs – While it’s possible to increase prices, in some industries, inflation can also lead to a rising cost of necessary supplies which negatively impacts profit margins.

Increased cost of borrowing – If you’re looking to expand your business, growth comes at a cost. For many, this means taking out a loan. If inflation and the Bank of England rate are high, so are borrowing costs.

Decreased employee wellbeing – When the cost of living and inflation is high, many people suffer stress and anxiety. This can be reflected in their well-being and performance at work. It may also lead to staff threatening to leave the business if a pay rise is not granted.

Increased overhead costs – When inflation is high, business costs begin to increase. Therefore, essential costs such as rent, mortgage, fuel, or utility payments may go up.

Fluctuations in foreign exchange – Inflation varies between countries, a factor which can affect businesses that trade around the world. High inflation can see the value of currency fall in relation to others.

If your business begins to feel the effects of inflation, there are a number of actions which can be made to improve cash flow:

Collaborate with partners and suppliers – If inflation is high, your business partners, suppliers, and customers will likely notice its impact too. Working together to agree mutually beneficial deals could help protect the supply chain and ensure ongoing business.

If projections state that inflation will continue to rise, investing in a larger-than-normal order could ease the effects of rising prices for your business and guarantee a sale for your supplier.

However, vendor diversification may need to be considered if partners and suppliers are unwilling to flex.

Improve efficiency – Efficiencies are more important than ever when cash flow is at risk. So, we’d recommend conducting a review and research your available options to see where waste can be reduced, and productivity and profit margins improved.

This could mean introducing automation, new technology or outsourcing, changing processes or communication methods, or even restructuring your workforce.

Review your service or product portfolio – When inflation rises, so can your prices. However, a service review is so much more than pricing adjustments. Get to know your customers, their current and future needs, and everything that goes into serving these. Then analyse the marketplace and your competitors.

Ask: What can you do to stand out and win custom? Do your customers value free and quick delivery, promotions and sales, and do some things sell better than others? Can the company offer more, or would it be better to streamline your portfolio?

Take out a trade credit insurance policy!

Trade credit insurance can provide you with the confidence you need to offer your customers competitive deals and grow your business offering at all levels of inflation. It covers your trade receivables for 12 months. So, if your customers become insolvent or fail to pay due to refusal or inability, your losses are indemnified.

Following the recent UK general election, there is much uncertainty for the near future – with inflation and the economy a hot topic. So, security is more important than ever.  Get in touch with our team at Allianz Trade to learn more about our market-leading trade insurance and how we could help you.