While last week’s decision by the Bank of England to raise interest rates from 0.25% to 0.50% didn’t come as a surprise, there is still lots to unpack regarding the short and medium term impact of the increase across specific sectors.
The COVID pandemic, skyrocketing energy prices and the ongoing effects of Brexit have taken inflation levels to a record high, currently standing at 5.40% for the 12 months to December 2021 and this is only projected to worsen to a peak of 7.25% in April 2022. However, there is light at the end of the tunnel as inflation is projected to fall to the Monetary Policy Committee (MPC) target of 2% within the next 2 to 3 years.
Construction is one of the sectors worst hit by inflation, where 12-month material prices have increased by 50-60% for materials such as particle board, fabricated steel and concrete reinforcing bars.
Other industries such as manufacturing, and shipping & logistics have not fared much better. Manufacturers seeing an increase of 13.5% in the input produce price index for 12 months to December 2021 and UK haulage and courier vehicles seeing a 19.2% increase in price-per-mile costs for 12 months to December 2021.
These sectors are likely to not see any improvements in the short term, but medium to long term can expect the prices of their main cost driver (energy) to fall as the global energy market is projected to stabilise by Winter 2022.
With businesses already struggling to manage costs and maintain margins, it is important that businesses take steps to weather the storm over the next year. Through our advisory work with a range of businesses, we have seen the following key challenges that businesses should be aware of over the next year:
- The unwinding of pent-up demand putting strain on supply chains and working capital as a result of easing of coronavirus restrictions globally
- Increasing energy prices through to the middle of 2022
- The new post-Brexit custom regulations leading to additional paperwork requirements, licensing and increasing the risk of delays at ports
Despite these factors, we are confident that businesses can overcome these latest set of challenges as they provide companies with a catalyst to really improve their business models, be it through optimising their operations by improving efficiency, passing on price increases or cutting unnecessary costs. As during the COVID 19 pandemic, stakeholder management, with customers, suppliers, employees and funders is going to be key to navigating through what is likely to be a difficult period for many sectors.
To return inflation from an expected peak of 7.25 per cent in April to the central bank’s 2 per cent target, the BoE announced action that will hurt most households at the worst possible time. The BoE monetary policy committee’s members voted five to four in favour of raising official interest rates from 0.25 per cent to 0.5 per cent, with the minority wanting a larger half-point increase.