Inflation takes its toll on small business

Small businesses have been told to prepare themselves for higher levels of inflation after an Office for National Statistics (ONS) report showed that it grew by its largest amount for more than a decade last month.

The ONS reported that the consumer prices index (CPI) inflation figures rose from 1.9% to 2.9% over December. It is thought that many small businesses will need to raise their prices in order to cope with the resulting increase in operational costs.

Economists around the country are attributing the rise in inflation to a number of factors, including the recent hike in energy and food prices over 2009. Also, given that VAT was returned to its level of 17.5% earlier this month, economists are expecting to see further inflation rises over 2010.

Howard Archer, the Chief UK and European economist of IHS Global Insight believes that inflation will now take longer to drop back towards the Bank of England medium-term target of 2%. He added that the data from December’s inflation figures will "make it even more likely that the Bank of England will call a halt to its quantitative easing programme at its February meeting, particularly as the economy seemingly returned to growth in the fourth quarter of 2009."

The Bank of England recently announced that interest rates would remain at the historic low of 0.5% for yet another month. However, many economists have stated their belief that there is a good chance that the Bank of England could start raising interest rates well before the end of 2010.