In this article, we look at the factors that contribute to inflation and examine where its impact is being felt the most. We also suggest ways to mitigate its effects and ensure long-term success for businesses and employees.
As a major UK employer, we know all too well how inflation is affecting businesses. Costs are rising while purchasing power is falling, meaning everyone is working harder to stand still.
Sharing the pain of inflation
Over the last few years, inflation has eroded the purchasing power of companies and consumers significantly. Buy something for £5 today and you’ll be paying £1 more than you did in 2019.
In October 2022, the UK’s main measure of inflation, the Consumer Price Index (CPI), reached an all-time high of 11.1% and is now running at 8.7%. The rise in the price of energy and food has been particularly steep, contributing to a devastating cost of living crisis that is rightly dominating the headlines.
We know that the inflation impact on industry is equally far-reaching. As families tighten their belts, consumer demand falls and sales drop. Supplies get more expensive, which has a knock-on effect on operations and profit margins. To offset rising costs, employees seek higher salaries and reduce the number of days they spend in the office. This can lead to increased staff turnover and growing disengagement from a lack of human connection.
Factors that contribute to inflation
The simplest cause of inflation is a mismatch between supply and demand. The poor harvests seen across Europe in 2022, for example, restricted the supply available to retailers and increased the price of food imports.
Then there’s the shifting labour market. Brexit, long-term illness and pandemic-influenced career changes have all shrunk the labour force, in turn driving up salaries. Data published in June 2023 showed that private sector wages, excluding bonuses, have risen by 7.6% since last year.
The Bank of England is tasked with keeping inflation to 2% and has announced 10 consecutive interest rates rises to encourage saving over spending. It expects inflation to reduce later this year, but for the moment it remains stubbornly high.
The inflation impact on businesses
The exact inflation impact on businesses depends on the sector. Costs, including labour, will almost certainly rise, but the effects on profit margins, prices and debt can vary. However, in our experience, the added pressure on employees has been universal.
Profit margins fluctuate between sectors
In some industries, inflation can lead to higher profit margins. The energy sector, for example, has seen prices and profits soar. In tech, on the other hand, rising costs in the supply chain are playing havoc with profits. Then in FMCG, food retailers and wholesalers are facing a treble whammy. They’ve seen poor harvests, higher costs but also constraints on their pricing power because shoppers are well-known for voting with their feet.
Reduced purchasing power dampens demand
As prices rise and consumer confidence falls, sales fall too. Big-ticket purchases might be parked altogether and brand loyalty erodes as people look for cheaper alternatives. The healthcare and life sciences sectors often sidestep these issues because governments and consumers prioritise health over other spending. And for pharma products, the CPI shows that prices have risen steadily since 2007, although costs are rising too. While buyers may be willing to pay higher prices for certain products, it won’t always translate into profit.
Interest rates affect the cost of borrowing
In the financial sector, the inflation impact has been mixed. While the Bank of England has raised interest rates several times, which improves profits for the banks, mortgage growth has clearly slowed. For other businesses, higher interest rates have a negative impact on companies as they increase the cost of borrowing. Loans and even company credit cards get more expensive, reducing disposable income. However, companies with debts taken out at fixed interest rates could see the overall value of those debts fall.
Employee well-being has taken a hit
The cost of living crisis has undoubtedly taken a toll on employees, with a quarter of British shoppers struggling with the 17% hike in grocery prices. Importantly, nearly two thirds of employees would consider leaving their job if their employer doesn’t recognise their struggles or offer support.
Putting employee well-being front and centre is vital to keeping good people. Yet our recent Work Experience Tracker survey, conducted with YouGov, showed two things: Firstly, that a fifth of employees cite poor mental and physical health, and secondly, that there’s a clear correlation between worsening health and the number of active or ‘quiet’ quitters.
Strategies to mitigate the inflation impact
In many ways, the inflation impact on businesses can be mitigated by good operating practices. Here’s how companies are counteracting the negative effects of inflation:
Regular reforecasting and a more agile approach
Inflation makes it harder to plan ahead, so regular reforecasting helps leaders to stay on top of emerging issues and adjust budgets and cash flows to match. More flexible workplaces introduce a natural agility too, creating a more elastic approach that meets both employer and employee needs. We repurposed the offices of leading investment and wealth management firm, to transform their food offer within a flexible, multi-use zone. It's improved the dining experience and freed up 219 square metres of office space.
Collaborating with suppliers and partners
Every business operates within an ecosystem alongside its suppliers, partners and customers. This means that collaboration is essential to protect everyone in the value chain from unsustainable price rises.
At Sodexo, we understand the burden of inflation on our clients and employees and have implemented various measures to reduce it. This includes working with our suppliers to add exciting new products to our menus and using our centralised menu management system to incorporate seasonal ingredients and control costs.
We're also continuing our war on food waste with the aim of achieving a 50% reduction by 2025. Our WasteWatch initiative has saved hundreds of tons of food waste to date, and we’ve also launched our ‘Waste in Mind’ programme to offer practical guidance for staff.
In addition, we've also partnered with a number of clients to offer free-issue food. This not only enhances the employee experience but also contributes to a happier, healthier workplace.
Helping employees to navigate inflation
To deal with rising food prices, we know that consumers have already adapted their shopping habits by opting for simpler meals, frozen vegetables and energy-saving cooking methods. In the workplace, it’s affecting whether they come to the office at all.
Hybrid working has already reduced the amount of human connection in the working week, with a negative impact on creativity and innovation. The cost of living is exacerbating that issue. Our Work Experience Tracker highlighted that 35% of employees want to do more remote working and that 92% cite inflation as the reason. This shows that improving job perks, like commuting benefits or better food options, could support employee well-being as well as long-term retention.
Companies like PwC and LinkedIn are also offering mental health days and access to financial advisors, as Sodexo does, to help employees cope with the crisis.
Will inflation continue to affect your business?
A period of high inflation will always affect businesses. It softens demand, increases wages and costs makes it harder to see what’s ahead. Keeping a close eye on market conditions can boost agility and help companies adapt investment plans, workplaces, borrowing and processes in good time.
The Bank of England is forecasting a reduction in the inflation rate through 2023, citing a fall in wholesale energy prices. That’s welcome news for consumers, but the Bank also expects those same consumers to be buying fewer goods and services. This means more uncertainty for business in the near term.
We help some of the UK’s biggest companies to optimise resources, cut waste and improve employee well-being. Get in touch to find out how we can help you stay vigilant and thrive during times of change.