Inflation pushes business costs to a record high for manufacturers

Posted on 21 Dec 2011

The UK’s small businesses are being hit by increasing costs and risk being squeezed out of their domestic markets, according to insurance firm MORE THAN’s quarterly Business Inflation Guide (BIG) that tracks the cost of the twenty most important expenditure items.

The new figures reveal that small manufacturing businesses in the UK, defined as being those with less than 50 employees, are experiencing annual inflation of 8.3%, an annual inflation rate 60% higher than the latest levels of consumer inflation recorded by the Office of National Statistics.

This is being driven largely by the increased cost of raw materials which, despite stabilising over the summer, were 17.5% more expensive in September 2011 than twelve months previously.

Gas and electricity costs for small businesses rocketed by 11.8 and 7.1% in the past twelve months, adding further fuel to the fire of high inflation.

The rising cost of operations, coupled with decreased demand in European and British markets, is likely to have fed into the sharper than expected drop of 0.7% in manufacturing output reported by Office of National Statistics for November.

Despite recent reports arguing that manufacturers are under pricing, low demand is making it difficult to pass rising costs on to customers, with small manufacturers most at risk of being priced out of their domestic market.

Mark Christer, managing director at MORE TH>N, said: “2011 has been a highly challenging and unpredictable year for small businesses, with consistently high inflation impacting both overheads and the level of demand for products and services.”

“As profit margins are squeezed maintaining cash flow is of utmost importance,” continued Mr Christer. “Sound contingency plans are essential to cope with market lulls and price fluctuations, not to mention the business disruptions we have come to expect from cold and unpredictable winter weather.”

Stephen Roper, Professor of Enterprise at Warwick Business School who conducted the research, gave a bleak outlook for manufacturing in 2012, rounding on the eurozone crisis as a source of the potential woes.

“Small companies may need to look to non-eurozone markets for growth in 2012 and many are likely to need increased support from advisory and financial services in order to reach out to these new markets,” said Professor Roper.

According to the report, small businesses will be starting 2012 with their purse strings under substantially more pressure than twelve months ago. Experts are expecting prices to rise sharply again, by at least 1.2% in the final months of 2011.