Inflation hits 3.1% – small firms brace for the next blow

Fuel prices jump as interest-rate fears return

Inflation is climbing again. Petrol and diesel are more expensive, oil remains above $100 and the Bank of England is warning that inflation could rise further. For Britain's small and micro businesses, already absorbing higher wages, employer National Insurance, energy, insurance, rent and regulation, another inflation shock is the last thing they need. And lurking behind it is an even bigger worry: higher interest rates.

INFLATION UP; SMALL BUSINESSES BRACING

Oil up; airfares up, prices up. The Bank of England is under pressure to raise interest rates. For small and micro firms, this is another blow to already‑fragile margins.

Inflation has crept back up. The Office for National Statistics (ONS) says CPI (consumer price index) inflation rose to 3.1% in August, up from 2.9% in July. Services inflation; the number the Bank of England watches most closely, is stuck at 3.4%. Core inflation is up too, at 2.6%.

The ONS says sharp price rises for petrol and diesel are behind the increase. Higher airfares and rising crude oil costs are feeding into raw materials and prices at the factory gate.

For small and micro businesses, this is the cost of doing business, and for many those costs will have risen much more than 3.1%.

Breaking Point

Small firms have spent two years absorbing higher energy bills, rising wages, increased employer NI, supply chain inflation. Alongside those many have found their insurance soaring and rent and business rates going through the roof. Another cost for many has been the cost of complying with new regulations and the admin that goes with them, such as Making Tax Digital and employee rights reforms.

Now that inflation is rising again, as predicted given the ongoing situation in the Middle East, the Bank of England may respond with higher interest rates.

For small businesses, that means the addition of higher borrowing costs as overdrafts, credit cards, loans and merchant cash advances all become more expensive. Households cut back when inflation and interest rates rises and that hits small businesses with falling demand for products and service.

With inflation rising and rates potentially increasing, investment plans get shelved.

Under Pressure

Inflation has been above the Bank’s 2% target for more than two years. Some bank officials are worried about price stability.

Economists warn:

• inflation could peak at 4.5% if the Iran war keeps oil prices high

• wage growth is slowing

• the labour market is weakening

• monetary policy is already restrictive

• second‑round effects (wages pushing prices up) are not yet visible

But markets are now pricing in further interest rate hikes into 2027.

For small businesses, higher rates mean:

• more expensive borrowing

• tighter cashflow

• reduced investment

• slower hiring

• more closures

Small firms don’t have buffers, and every rate rise has an impact on them immediately.

Blame

Chancellor John Healey says the Middle East war is “impacting inflation worldwide” and points to government actions to cut VAT on electricity, the £2 bus fare cap and lower business rates for pubs, clubs and live venues. For small businesses these are drops on a very deep ocean.

The other side of that argument is that rising taxes and new employment regulations are pushing costs onto businesses and then onto consumers. Small businesses agree that when costs rise, they have two choices: raise prices or cut back and neither is good for the growth the UK desperately needs.

A Perfect Storm

Inflation rising at the same time as weak demand, rising borrowing costs, supply chain volatility and geopolitical shocks, creates a perfect storm for small businesses and there’s a real possibility they end up closing.

Inflation rising to 3.1% is not just a number. Small and micro businesses are already carrying the heaviest cost burden in the economy. Another inflation spike, and the rate hikes that may follow, could push many over the edge. The next Budget must recognise this. Either government reduces the costs to small businesses, which are stacking up, or inflation and interest rates will do the damage instead.

Small firms need stability, lower costs, and breathing space, because when inflation rises, small businesses pay for it.