The Office for National Statistics (ONS) recently reported that UK inflation fell to 2.5% in December 2024, down from 2.6% in November, before increasing to 3% in January, beyond the forecast figure of 2.8%. These unexpected movements have sparked discussions about interest rate cuts and their impact on businesses. However, regardless of the initial reduction in inflation, with upcoming payroll cost increases in April, many companies are still facing financial pressures.

Let’s explore what this means for your business and how you can prepare for the challenges ahead.

Understanding the Inflation movements

The decrease in inflation to 2.5% was primarily driven by lower energy and food costs. While this is a positive development, it’s important to note that the rate remains above the Bank of England’s 2% target. The core inflation rate, which excludes volatile items like food and energy, also fell to 3.2% from 3.5% in November.

The increase to 3% in January brought inflation to the highest figure for 10 months, and was again driven by plane fares, private school fee increases and the costs of food, primarily meat, bread and cereals.

Potential interest rate cuts

The initial unexpected drop in inflation increased expectations for Bank of England rate cuts in 2025. At the time of writing, the base rate stands at 4.5% after cuts in August and November 2024 and February 2025. 

Whilst the most recent 3% figure has probably reduced the chance of a further cut in March 2025, financial markets are still pricing in further cuts, with some experts still suggesting there could be two more interest rate cuts this year.

What this means for borrowers…

If you have existing loans or are considering borrowing for business expansion, potential interest rate cuts could still lower your financing costs and improve cash flow. However, it’s crucial to remain cautious as any rate cuts are still speculative and dependent on further economic data.

What should business owners do? 

1. Review current loans and financing arrangements.

2. Consider fixed-rate options to protect against potential rate increases where possible.

3. Explore refinancing opportunities if rates do decrease.

Cost pressures coming in April 2025

Businesses will face significant cost pressures in 2025, particularly with payroll expenses. As mentioned elsewhere, changes include:

1. National Living Wage and National Minimum Wage increases.

2. Higher Employer National Insurance Contributions rates.

3. Reduced National Insurance threshold.

These changes will impact the majority of sectors, but particularly hospitality, retail and care industries.

Preparing for increased costs

Consider the following strategies:

1. Cash flow management: Ensure you have accurate forecasting in place to ensure your business can meet its obligations and its goals for the year. In particular, be aware of any pinch points as these may have a greater effect with costs increasing.

2. Pricing strategy: Carefully evaluate your pricing structure to determine if and how to pass on increased costs to customers. [link to separate post]

3. Efficiency improvements: Can you invest in technology or streamline processes to offset rising costs? For example, automation tools can be an affordable way to reduce or streamline administrative workloads and improve productivity.

4. Workforce planning: Assess the financial impact of wage increases and review staffing levels to identify potential cost-saving areas.

Economic Outlook for 2025

The UK economy faces further challenging times, with the most recent inflation announcement alongside stagnating economic growth. Business confidence has plunged to a two-year low amid higher taxes and weak demand. Additionally, UK trade growth prospects remain subdued, with projections of just 0.7% annual growth until 2033.

In conclusion…

While the initial drop in inflation was positive, the bounce back up to a level well beyond that forecast shows there are still some major challenges ahead. The potential for interest rate cuts remains and offers some relief, but looming cost pressures, particularly in payroll, require careful planning and decision-making.

We will of course keep you up to date with the latest announcements and developments, but if we can help with your financial planning, cash flow forecasting or cost management, please get in touch.