By Marcus Leach

The level of inflation in the UK rose yesterday (Tuesday), jumping by 0.5% according to official figures.

The official rate now stands at 2.7%, having been at 2.2% in September, driven up by education costs, largely because of a sharp rise in university tuition fees.

But what does that equate to for small businesses? Manos Schizas, Senior Economic Analyst at Association of Chartered Certified Accountants(ACCA), answers that very question.

“Small businesses are price-takers and often sit awkwardly between wholesale and retail, as they make some purchases as consumers and some as businesses. It is hard to estimate their exposure to inflation, although there have been some efforts to do so through the years," he said.

"For small businesses, inflation isn’t just about costs.

"First of all, it is also about liquidity. In the UK, and indeed in most countries, most of the small business sector’s liquidity doesn’t come from banks, but rather from suppliers. Small businesses generally use credit obtained at last month’s prices to pay for outgoings priced at today’s prices, and hence are vulnerable to sudden price changes.

"Second, it’s about market power. Inflation generally subsidises those with market power at the expense of those without, and SMEs are usually among the latter. They are less likely to be able to pass higher input prices on to their customers.

That said, based on ACCA’s survey data from our Global Economic Conditions Survey, I expect that SME input inflation has risen only marginally quarter-on-quarter, and will have fallen substantially year-on-year. SME input inflation probably peaked in mid 2011 after rising more or less steadily for two years, as globally commodity prices started to settle and the economic recovery ran out of steam.”

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