News

July 02, 2010

Record inflation rises cost small firms

Small businesses felt the impact of the sharpest quarterly cost rises for five years in the first three months of 2010, research by insurer More Than has revealed.

The Business Inflation Guide, produced by More Than and Warwick Business School, revealed that small business costs rose by 2.7 per cent in the first quarter of this year compared to the last quarter of 2009. This represents the biggest quarterly rise since 2005.

The research also highlighted that consecutive cost rises over the last four quarters, ending in the first quarter of this year, have meant that small firms’ costs have increased by a total of 6.5 per cent over the last year.

Vehicle maintenance and tax saw the biggest in prices (7.5 per cent) in the first quarter of the year, with fuel costs rising by 6 per cent and office equipment by almost 6 per cent. Manufacturing firms suffered the brunt of the increases as they saw their costs rise by 3 per cent in the first quarter of 2010, largely due to the higher price of raw materials.

The British Chamber of Commerce’s chief economist, David Kern, said rising costs were putting “serious pressure” on small firms struggling to recover from the downturn.

“The combination of a weak pound and higher prices for raw materials are adding to the misery for small businesses, particularly for importers,” he said. “But many firms will be reluctant to increase prices as this may dampen demand from customers.”

Kern added that putting up interest rates to stem inflation would be a “disaster”. “Higher interest rates are the last thing small businesses need at the moment, just as the recovery is beginning to take hold,” he said. “What the Government can do is reduce regulation to make it as easy to trade as possible.”

On a positive note, Kern said he believed that overall inflation had “probably peaked” and that costs would start to edge downwards over the next six to 12 months.

Warwick Business School professor of enterprise at the centre for small and medium sized enterprises, Stephen Roper, said: “Economic recovery looks set to take longer than expected and small businesses are still facing a challenge in getting financial support from the banks. Subsequently, they are being forced to push up prices for their customers in order to absorb costs.”