By Marcus Leach

The inflation figures announced today (Tuesday), which are not only higher than forecast, but also at the highest level in three years, could indicate that businesses in the UK are about to suffer even tighter squeezes.

Inflation exceeded predictions, surging to 5.2% in September, which represents a 0.7% increase- the largest single monthly gain since 2009.

David Hudson, Restructuring and Recovery Partner at Baker Tilly explained that this could spell trouble for businesses.

“Inflation is being driven by essential items like fuel, electricity and gas which cannot be avoided," he said.

"If interest rates increase, as many commentators expect before the end of 2011, businesses will find themselves caught in the crossfire between inflation and interest rate rises, neither of which they can duck.

“While some businesses that have survived so far are tough and in good shape to move forward, many are just hanging on, relying on interest only arrangements or Time to Pay agreements. Rises in interest rates will particularly impact these companies forcing them over the edge.”

George Bull, Senior Tax Partner believes until now risks have been low for businesses, but after the rise in inflation that has changed.

“While the UK has been in the uncomfortable situation caused by moderate inflation and low interest rates, the banks have been largely unaffected and many businesses have been able to get by," he commented.

"As we are moving to a more dangerous situation with high inflation, aggressive tactics from HMRC and businesses suffering from higher costs the risks are even higher for businesses.

“Individuals are feeling the squeeze and may push into a wage driven inflation spiral. However, high unemployment levels may act as a break, stopping wages from keeping up with the cost of living. The net result of all of these factors in that businesses haven’t seen real pain yet, but it’s coming.”

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