Inflation Or ‘Ripflation’?: It Will Be Here For Longer Than You Think…
In this article, Chairman of Bell & Company, Terry Bell, gives his commentary on the current inflation crisis in the UK and what it might mean for businesses:
The good old media are now torturing us with the ‘cost of living crisis’ and with that backdrop, we share our findings and thoughts. We are looking to cut through the BS and proffer a different thought process on inflation.
What entitles us to make such commentaries?
1. We hear from over 200 businesses owners and individuals a month telling us of their varying struggles in the current SME environment
2. We pride ourselves on our continual education as to what is going on in the real world by reviewing meaningful resources such as the FT and Economist, reports by financial bodies such as R3, the Insolvency Service etc.
3. Good old common sense and daring to have opinions and having the audacity to share them!
Yes, there are difficulties out there, especially with the poor in our society. Most notably with those struggling with the huge surge in energy prices. As business owners, we have a role to play in society. The government is there to ensure that the most vulnerable are supported and cared for.
Inflation has not really been on the radar since the late 1990s and the next major economic event thereafter was the 2008 crash. This saw Governments undertake massive Quantitative Easing (QE) programmes worldwide.
Still feeling the effects of 2008…
These programmes of ‘money printing’ have culminated in huge excesses of cash in the system. Unfortunately, the governments of the world have been too slow to turn this tap off. So, as with 2008, this will create the situation where we see too much cash chasing too few assets. This will then culminate as a major contributor to inflation.
We won’t see a crash in the same form as 2008, but the spectre of inflation looms large and for a longer period, in my opinion.
Another effect of the increase in monetary supply has seen the creation of very complex financial markets e.g. The huge increase of lending sources outside the ‘Big 4’ banks, such as Peer 2 Peer platforms and other creative Fintechs.
There are so many elements to consider that are affecting the SME economy right now and if you considered them every day – you wouldn’t even get out of bed!
A couple of pieces of advice I would like to share with all SMEs:
• Businesses trading in difficult times must be flexible and they have the innate ability to change, the phrase ‘pivot’ is so right
• A key business concept drilled into me by my old senior partner… was that even in bad times… protect the margin
Easily said – hard to do – but so vital. It is vital to look to hold onto your gross margins.
In my humble opinion, I see the current levels of inflation taking up to three years to control – quite the claim.
It’s out of control, with so many mitigating factors and Governments having few tools to apply here to grip it plus inflation suits Government’s agendas, in terms of eroding the huge debt levels they have accrued, even before Covid-19.
Many commentators are too busy looking for the ‘gotcha moment’. and in the main see this inflationary surge taking until May mid-2023 to come under control. BUT they are also the same commentators saying just three months ago that this inflationary push was transitory.
What is causing inflation?
At the risk of sounding like a ‘broken record’, the world’s economy is so complex and so susceptible to any unexpected change. As we write we are seeing:
• The War in Ukraine having a huge effect on the availability of fertilisers. This will permeate through to ‘farm gate’ prices.
• Our supply chains are remarkably interwoven and rely on just-in-time stock supplies.
• The current travel system will be overloaded. This is due to staff shortages because of industrial changes and people seeking job security in other industries.
• The Evergreen tanker ship got stuck in the Suez Canal crippling the supply of computer chips as 80 ships at the time could not get through the Canal.
Our consumption levels are currently huge (especially for rubbish!). Examples of shortages are plentiful. The mega IT companies known as FANG (Facebook et al) are now creating and developing their own chips so that they can control their own supply chains.
All of this takes us back to inflation and why it will continue to increase. The current reported rate of 6.2% is frankly ridiculous (Jim Royle would have commented 6.2% – my arse). That is before the real slow burner comes into play and that is wage inflation. It will take time to infiltrate the system but, infiltrate it will.
Wage inflation…the real killer
As an economy, we are service led and SMEs need to recognise that their teams are vital in terms of their ability to deliver and team retention. Staff investment and retention are imperative as the employment markets are so fluid. This in its own way will bring into play its own added inflationary pressure.
Believe me when I say this by sincerely hoping all SMEs weather the storm. But, they won’t as the SME economy wrestles with the inflationary spiral and all the other features that contribute to this the most important part of our economy.
I have referred on a number of occasions to Luke Johnson’s comment that companies were struggling prior to Covid-19. As he said they had ‘pre-existing conditions’. Covid-19 and the ongoing uncertain background it has created means many others will fail.
To give any business a chance, they must now be flexible and must be ready to pivot. The days of merely opening the shop and just hoping for custom will not do if a business is to survive. At Bell and Company strive to better ourselves in every way and the day that stops, then so does our development.
This brief blog represents my opinions only but whatever you do, don’t think inflation will slowly decline of its own volition just because of 0.25% interest rate rises. It is here for the medium term, not the short term
*The excellent Sunday Times Business editor, Oliver Shah wrote a great article on companies that basically are riding the back of inflation and rising raising their prices just because they can – whilst we are captivated by the ‘cost-of-living’ crisis.
Essentially ‘rip off inflation’ or Ripflation as he called it.