With consumer spending up and restrictions coming to an end, our economy is recovering at pace. In fact it’s recovering much more quickly than the Bank of England (BoE) had forecast. In recent months official figures have indicated that inflation rose to 2.1% in May, from 1.5% in April. This is slightly above the BoE’s 2% target, which may seem insignificant, but 0.3% is a big percentage difference in real terms. Especially given that interest has been kept so low for so many years.

Interest rates are staying put

The BoE’s Monetary Policy Committee (MPC) met yesterday to vote on changes to interest rates and other economic policies. They published the minutes of the monthly meeting, announcing that the committee voted 9-0 to keep interest rates unchanged at 0.1%. This was a record low introduced to help manage the effects of the pandemic.

The committee also decided to stand firm with current levels of quantitative easing (effectively printing digital money) to help protect the economy through to the autumn. Anyone who has taken on a mortgage over the pandemic will be pleased to hear that interest will not be rising. But savers will be much less thrilled.

Although almost everyone on the nine-person committee was in agreement, the exiting Chief Economist, Andy Haldane, was not. He’s been voicing concerns around monetary policy and inflation for some time. Currently, the yield on 10-year government bonds is at its highest level in a year, growing 50 basis points over June. Haldane warned the rest of the committee to begin easing off this rate of bond buying because he believes they’re underestimating the true rise of inflation.

In the end, the rest of the committee voted to stick to its current bond-buying programme at £895 billion. Haldane was the only committee member to vote against this, preferring to reduce the programme to £825 billion. In May he had already voted to cut these asset purchases, so it hasn’t come as much of a surprise. But the debate has certainly been sparked.

What about inflation?

In a New Statesman article earlier this month, Haldane warned that we’re at a crucial moment regarding inflation. In it he wrote: “while nothing is assured, acting early as inflation risks grow is the best way of heading off future threat.” And in February he described inflation as a sleeping tiger that has been “stirred from its slumber”.

So how worried should we be? There are two schools of thought here. The first is that the inflation we’re seeing right now is to be expected. With many businesses reopening, and some people’s savings nicely topped up during the pandemic, spending was naturally going to increase in April and May. Add to that some general boredom and supply chain challenges, and it’s not hard to see why people are spending more and costs are going up. The assumption is that it should level out at some point.

The question is just how short-term these effects will be. And that’s anyone’s guess. But many economists and central bankers think over the next year the rate of inflation will go down. With the furlough scheme ending in September and pent up demand settling, things will even out. What’s more, the delayed reopening should slow things down further and the idea is that things should get back to normal organically by 2022.

Haldane, on the other hand, is concerned that inflation will be more difficult to tame than his colleagues do. Although the BoE has revised its inflation forecast and growth expectations since the May meeting, it’s possible they haven’t gone far enough. Now they’re expecting inflation to tip over 3% by the end of the year, rather than the 2% that had been previously forecast.

Although this is much lower than the Fed’s 5% forecast for the USA, it’s not to be taken lightly. In February, consumer inflation was just 0.4%. This year we’ve seen the highest rate of medium-term inflation since the financial crisis in 2008. And higher inflation means that the money we save is simply worth less.

So while the MPC’s policies are staying the same in a bid to help the economy recover, they’ve acknowledged that inflation will keep rising. Time will show just how transient the effects of consumer spending and the rising cost of goods will be. Now’s the moment when business owners need to be considering what that means for their finances and access to cash.

What does this mean for businesses?

When inflation goes up but interest rates don’t, it’s our savings and the money we have in the bank that’s harmed. The best thing you can do is to be decisive. If there are changes and upgrades you want to make, be clear about when you’re going to make them and how they fit into your recovery. Money that’s sitting in the bank for a rainy day may not have the same value in a year’s time, so plan wisely.

If you want to make big changes soon like upgrading equipment or warehouse space, think about the price hikes you might see with inflation. Take a look at available government initiatives like the Recovery Loan Scheme to fund those improvements. It’s there to help strengthen your recovery.

If your needs are more ongoing and more operational (for example, salaries and stock purchasing) then you’ll want to explore other solutions. Cash flow that can be boosted in the short-term might be what you’re after here.

A MarketFinance flex loan is a versatile tool you can use to access cash on demand to cover these smaller, ongoing costs. You can apply for £5,000 to £50,000 that can be accessed all at once or in smaller amounts as needed. As soon as you’re able to, you can repay the money you’ve taken out of the facility and the balance will effectively reload. You can withdraw and repay your flex loan like this as many times as you like. What that means is you’re not sitting on a bank of cash that might lose value. You only take out what you need, when you need it. And you only pay for the funds you use.

If you’re after a healthy cash flow boost to tackle the next few months then head to our website to browse your options. Or simply tell us here about the costs you need to cover and we’ll suggest the right solution for the job!