addressing the issue

winter 22 addressing the issue dealing with the cost of living crisis

With inflation currently above 10% the cost of living crisis is truly putting a squeeze on all of us. We spoke to Entrepreneurs' Forum members to find out how they’re supporting staff through what could be an extremely tough time financially and how they’re feeling heading into 2023.

From rent and mortgages, to energy and food, the increasing cost of everyday essentials means the battle to keep heads above choppy financial waters remains intense. While the cost of living has been increasing in the UK since early 2021, recent developments, from energy prices to supply-chain shortages, combined with many other external variables means inflation is now at its highest rate in 40 years. But what does this mean for UK households? According to the Office for National Statistics, a staggering 93% of adults have reported an increase in the living costs compared to one year ago while 90% say that costs have become more expensive in the last month alone (October - November 2022). Rising prices mean many have already had to make spending reductions with two thirds (66%) of Britons reporting they have had to make some form of financial cut. For entrepreneurs, understanding how to not only support their employees through the crisis, but how to keep their business afloat amid increased costs and reduced consumer/client spending will be an immediate challenge in the following months. To get a greater understanding of how the cost of living crisis is affecting our members, this quarter we ran our pulse survey which focused on the issue. With responses from 85 North East entrepreneurs, the data reveals that the cost of living crisis is having a real impact on businesses at all levels and many are implementing strategies that aim to support their employees through this period. Interestingly, only 25% of respondents reported that they had already increased pay in line with inflation for all of their employees. A further 25% had raised pay but at rates below current inflation while 28% of respondents said they were not currently considering pay rises with many looking at alternative ways of supporting their staff. In regards to one off bonuses, even fewer had already taken action with 8% having implemented one off bonus payments for all staff, paying all staff the same fixed amount. Inflationary pay rises or bonuses are not always affordable, so in their absence, members are actively introducing other practical support designed to help their employees manage the rising cost of living. Implementing flexible working has been a big focus with employers recognising that daily travel costs can be reduced by removing the need to travel into the office every day. Some members are also offering their staff healthcare support and programmes including healthcare insurance, free flu jabs and mental health support. Another strategy to help staff combat the cost of living crisis has been simply to encourage more discussion around the subject as well as offering free financial advice, tips to lower bills and in some cases, access to interest free loans. Meanwhile, some members have started to provide food at work or offer discounted

travel and supermarket vouchers. With so much uncertainty around the economy and the prospect of a challenging few months ahead, the survey also asked members to list the challenges they expect to face in the upcoming quarter. One key challenge shared by members is customers/clients' reduced spending, especially in relation to their resistance or unwillingness to meet price increases – a factor that is directly linked with the cost of living crisis. Other wider economic factors such as rising inflation, cash flow and supply chain issues were also raised by members, with the added difficulty of how members can ensure their business continues to grow throughout an uncertain and unstable economic climate. Yet despite the current financial challenges faced by our region’s businesses, we’re reassured that when asked about how they were feeling about their own business’s prospects, most Forum members had a positive outlook. In fact, 73% reported that they were feeling optimistic or very optimistic about the year ahead. Only 7% of members said they felt pessimistic about the future, with some stating that projects are slowing down and the cost of living crisis is weighing heavier on their shoulders. The remaining 19% said they felt neither optimistic or pessimistic and there were no noticeable differences in the responses by industry. It is undoubtedly a challenging time for employers and employees alike with so much uncertainty surrounding the stability of the economy. Yet despite this, Forum members not only remain optimistic about the future but are, in their nature, providing practical solutions and supporting their staff as best they can.

“What is for certain is that inflation is with us for some time to come.”

Andy Briggs, IA Growth

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What do we mean by a “cost of living” crisis – other than a dramatic media headline, what is it? Prices are going up everywhere, it’s called inflation. In recent years inflation (measured by the consumer prices index – “CPI”) has been historically low. Prior to the current spike, the last time inflation was above 3% was 2012 (10 years ago) and the last time it was above 6% was 1992 (30 years ago). The 1970s frequently saw doubledigit inflation peaking at 24% in 1975. This was due to the rapid rise in oil prices, rising wages due to powerful trade unions keeping up with living costs and a lack of independent monetary policy. Until recently, energy prices have been stable, whilst unions have been weaker and the Bank of England continues to maintain monetary policy (interest rates etc). But what causes prices to increase? In economic terms it is the balance of supply and demand – restricted supply and increased demand leads to inflation. Interest rates and exchange rates also play their part – interest rates have been at an ‘emergency’ low level since 2009 when they fell from 5% to 0.5% - today they are currently back up to 3%. In 1979 they touched 17% and remained over 10% for most of the 1980’s. We now have a global ‘perfect storm’ – energy prices and other commodities are rising due to the war in Ukraine. Also, we are coming out of covid which caused supply issues and cost increases particularly in the Far East. We also have pent up demand – we live in a society where we want things ‘now’ (on cheap credit) and during covid the government pumped huge amounts of money into the economy in the form of furlough. Add the two together and we now have high inflation. So what do we do? Raise our prices, pay employees more, purchase more stock now before it goes up in price. All these depend upon specific circumstances, elasticity of demand, availability of working capital (at higher interest rates) so the need for a fully integrated business financial model to run revised assumptions and assess the impact is crucial. And what about the impact of technology to improve productivity – pay more, make more but keep prices down – that will give a competitive advantage as well as help to bring inflation down and even help contribute to net zero targets. This is a huge subject with complex interactions and the thoughts above have only scratched the surface. It changes daily, perhaps when this article is published the war in Ukraine is over – a nice thought but unlikely. What is for certain is that inflation is with us for some time to come – entrepreneurs are great at thinking outside the box – and now it is time to prove it! These are not extreme times, but they are times many of us have never experienced before.