apple and money showing inflation

Inflation has fallen back from the double-digit highs of 2022 and 2023, but at 3.8% (CPI) it’s still well above the Bank of England’s 2% target. Meanwhile, the base interest rate sits at 4.0% – its highest sustained level in over a decade.

For business owners, this creates a mixed picture. On one hand, savings accounts are offering better returns than in recent years. On the other, the real value of your money is still being eroded, and borrowing costs remain elevated.

Here’s what you need to know and how to stay ahead.

What is inflation?

Inflation is the rate at which prices rise over time. For example, if a loaf of bread costs £1 today and goes up to £1.04 next year, that’s 4% inflation. Over time, this reduces the purchasing power of money meaning £100,000 today will only have the buying power of around £96,200 in a year if inflation remains at 3.8%.

The Office for National Statistics (ONS) tracks inflation through the Consumer Prices Index (CPI), which measures the cost of a “basket” of over 700 goods and services. This basket is updated annually to reflect changing spending habits. In 2025, items like e-bikes, home security cameras, and frozen berries are included, while older items such as CDs have been removed.

What’s driving inflation in 2025?

Several factors are keeping inflation above the 2% target:

  • Wages and services: Pay growth remains strong, keeping service costs high

  • Food costs: Prices are still rising, with food inflation at 5.1%

  • Housing and utilities: Rent and mortgage costs remain elevated

  • Global factors: Energy markets are volatile and supply chains remain more expensive than pre-pandemic

Inflation may be far below its 11.1% peak in 2022, but it remains “sticky” in sectors like wages and housing. That’s why the Bank of England is holding interest rates at 4.0% to stop inflation climbing again.

How inflation affects your business

Even with interest rates at 4.0%, inflation at 3.8% means your money is losing value in real terms. For business owners, this can show up as:

  • Rising costs for materials, stock, and utilities

  • Higher wage demands from staff

  • Tighter profit margins if prices aren’t reviewed

  • Increased borrowing costs

  • Shifts in customer spending as households cut back

Example: If your business has £50,000 in the bank and inflation is 3.8%, its real value after one year will be closer to £48,100. Even with 4% interest, you’re only just keeping pace.

Your inflation action plan:

Practical steps you can take right now:

  1. Review pricing quarterly – small, frequent price rises are easier for customers to accept

  2. Negotiate with suppliers – push back on increases, seek bulk discounts or longer terms

  3. Tighten cash flow – invoice promptly, chase late payments, reduce reliance on overdrafts

  4. Bring forward capital investments – lock in today’s prices and take advantage of capital allowances

  5. Fix borrowing costs where sensible – secure a fixed rate on loans or mortgages if it helps budgeting

  6. Plan for wage pressures – build expected pay rises into forecasts so you can stay competitive

  7. Look for efficiency gains – automate admin, review software subscriptions, and cut waste

Think ahead, don’t just react

Periods of high borrowing costs and moderate inflation often shake out weaker competitors. If your business is cash-strong, you could be in a position to:

  • Negotiate better terms with suppliers keen to secure stable customers

  • Acquire competitors or assets at lower valuations

  • Expand market share while others pull back

We also recommend running scenario planning exercises:

  • What happens if interest rates rise another 0.5%?

  • What if inflation drops to 2% by next summer?

  • Could you cope with a 5% increase in wages?

This forward-looking approach gives you options instead of forcing you to react under pressure.

Don’t forget your personal finances

If you take a salary or dividends from your business, inflation also affects your household budget. We often help clients strike the right balance between extracting profits tax-efficiently and making sure their personal spending power keeps pace with inflation.

Looking ahead

Most forecasts suggest inflation will remain above the Bank of England’s 2% target into 2026. While this may feel concerning, it doesn’t have to derail your business. Our view is that businesses that take proactive steps now, rather than waiting for the economic picture to clarify, will emerge stronger and more resilient.

In our experience, businesses that act early, rather than react, are far better positioned to withstand economic pressure and even take advantage of opportunities when others are struggling.

If you’d like tailored guidance on protecting your business from inflation and higher interest rates, our advisers work with SMEs every day to strengthen cash flow, optimise tax planning, and safeguard profits.

Book a free consultation today and make sure your business thrives, whatever the economic climate.

Need help building a plan to protect your business from inflation and higher interest rates?

Book a free consultation with one of our advisers today and let’s make sure your business thrives, whatever the economic climate.

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