It’s hard to get through the working week without seeing a news bite regarding inflation, interest rates or energy prices. With the cost-of-living crisis firmly resonant, and the UK economy amidst the largest scale challenge since the 1970s, it’s difficult not to feel anxious. However, there was some good news recently with the announcement that inflation has fallen to 6.8%.
In June, it was reported that inflation stood at 7.9%. It’s now the second consecutive month that the inflation rate has dropped sharply. it is now at a 15-month low. It’s worth noting though that UK inflation remains stubbornly high overall. This is compared to many other nations, and well above the Bank of England’s target rate of 2%.
We analyse the data and reasoning behind the fall in inflation, why the news should be taken with a pinch of salt, and what it will exactly mean for UK households and businesses…
Why Has Inflation Dropped To 6.8%?
Inflation is a measure of the rise in prices over time. Falling inflation basically means that prices are rising more slowly than they were earlier, however they are still rising. The reason behind soaring inflation is due to the increase of the cost of goods like food and energy bills.
A 10% inflation rate equates to a £1.00 bottle of milk rising to £1.10 over the past year. A 5% inflation rate does not mean the price has gone down. It means that there has been a smaller price rise, equating to £1.05 over the year. Deflation is the term for prices falling more than what they previously were. Respectively, this can bring its own economic problems.
One of the main contributors to the drop in inflation has been the rise of wages. It was recently announced that In April to June 2023, annual growth in regular pay (excluding bonuses) was 7.8%. This is the highest regular annual growth rate since comparable records began in 2001. As well as this, a change to the energy price cap has also made significant effects on inflationary rises. The average household in England, Wales and Scotland using a typical amount of energy will now pay £2,074 a year, a drop of £426 a year. This easing of prices has made a somewhat positive impact on households. However, still millions of people are struggling to put food on the table without fear of being out of pocket.
Will Inflation Continue To Drop Sharply?
It’s predicted that inflation will continue to fall, however it’s unlikely there will be any huge drops. The drops will be incrementally small over the coming months. However, it is unlikely that the rate will hit the 2% target by the end of 2023. The Institute for Fiscal Studies claim that Prime Minister Rishi Sunak’s inflation promise is in jeopardy, in response to the latest figures. They state, ‘If price rises for other goods and services also remain stable, this will be almost sufficient for the Prime Minister to meet his inflation target. Much therefore depends on what happens to goods and services excluding food and energy prices (so-called core inflation).’
The Prime Minister claimed in January 2023 his government would halve inflation, when it was recorded at 10.7%. With the announcement of inflation at 6.8%, he stated, ““As prime minister, I am determined to build a better economy and a better country for you, your children and your grandchildren. That starts with tackling inflation and the news this morning shows that the plan is working. If we stick to the plan I’ve set out, we’ll get it done.”
Following this, Chancellor Jeremy Hunt, also said, “The decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year. But while price rises are slowing, we’re not at the finish line. We must stick to our plan to halve inflation this year and get it back to the 2% target as soon as possible.”
Core inflation across the EU and in the US fell in July, while remaining stagnant in the UK. Core inflation refers to the change in prices of goods and services, exempting food, alcohol, tobacco, and energy.
What Is The Impact Of Inflation On Businesses?
Much has been documented about the effects on households and families in relation to soaring inflation. However, for businesses the impacts are just as startling. A reported 61% of SMEs identify inflation as their top concern on business operations. For businesses, this then breaks down to even more alarming issues. These include profitability, staff retention, and the overall health of a business likely to be impacted.
At Nordens, we know these issues all too well. We have the experience of dealing with thousands of businesses going through the same turmoil and anxieties. We’re here to help you no matter what, whether you’re experiencing cashflow problems or just need to talk to someone about the challenges you’re facing and the need for support. We can’t stress enough, if you’re worrying about the current situation, please give us a call or a WhatsApp on 020 8530 0720 or email us enquiries@nordens.co.uk and we’ll be in touch right away.
What We Have To Say About It
Our CEO, Mitch Hahn, states, “In the face of shifting economic conditions, it’s evident that the recent decrease in inflation, albeit a positive development, is only a part of the larger picture. The factors contributing, such as adjustments in energy prices, should be acknowledged as postive steps. The overall trajectory however, remains a concern.
As businesses grapple with the ripple effects of inflation, including challenges to profitability and staff retention, it’s crucial to recognise the intricate landscape they operate within. Business owners should be working with their accountants more so than ever. As accountants and strategic business advisors, we understand the multifaceted impact of these economic shifts on businesses of all sizes.
Whether it’s ensuring efficient cashflow management or providing strategic guidance, your accountant should be, if not already, ready to support you. In times of economic change, collaboration and informed decision-making are key, and we are here to guide you every step of the way.”
We hope this has outlined to you the facts behind why inflation is falling and the impact this will have. If you’d like to know any further information, or anything accounting related, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy to talk you through your query.
