Market Insight Report Rising costs and taxes add to business woes
January 2025
A survey of senior executives at private sector companies, which is closely monitored by businesses and policy makers, has revealed that inflation is turning higher again [1].
The flash UK purchasing managers’ index (PMI) for January from S&P Global, reported that input costs and prices charged rose sharply across both goods and services in January.
Businesses blamed higher wages, soaring tax burden, weaker pound (resulting in more expensive import prices) and energy costs for the return of inflationary pressures.
Inflation pressures and weak growth increase risk of stagflation
Data from the Office for National Statistics (ONS) showed the annual rate of inflation, as measured by the Consumer Price Index (CPI), dropped slightly to 2.5% in December from 2.6% in the previous month [2].
Although inflation has come down significantly from its peak in October 2022 when it reached 11.1%, it remains above the Bank of England target of 2%.
To curb inflation, The Bank raised the base rate from 0.25% at the start of 2022, to a peak of 5.25% in August 2023 [3].
As inflation started to decline, The Bank cut interest rates to 5% in August 2024 and to 4.75% in November 2024.
The Bank held the base rate at 4.75% at its December meeting.
UK key macroeconomic indicators
Meanwhile, economic growth has stalled and many economists fear that the UK economy is heading for stagflation [4].
Stagflation is defined as a period when prices are rising but economic growth and employment are stagnant.
The S&P Global flash UK PMI survey reported that businesses are cutting jobs at the fastest pace since the 2009 financial crisis, excluding the pandemic [1].
Business confidence continues to slide
Confidence in the 12-month outlook is deteriorating, driven by businesses, and households too, responding negatively to the new government’s policy announcements and implementation.
Four of the largest and longest running business sentiment surveys, showed a decline in optimism for the third consecutive quarter – except for the Lloyds Bank Business Barometer which reported a second consecutive fall in confidence [5] [6] [7] [8].
Business confidence surveys
Key observations from the surveys’ results
- Business leaders are increasingly concerned over the impact of the tax burden on their operations
- Companies are likely to increase prices to keep up with mounting running costs
- Executives expect profits to fall over the next 12 months
- Reducing costs is the top priority for businesses, followed by increasing cash flow [9]
Business priorities in the year ahead
High energy costs - a challenge and an opportunity
High energy costs continue to be cited as a key concern for many businesses, even though the peak of the energy crisis is behind us.
Over half (51%) of companies mentioned rising energy costs as the top risk to their operations in 2025 [10].
Top 5 risks cited by businesses in 2025
To offset the increase in running costs, companies plan to deploy a wide range of defensive strategies.
These include…
- Passing on costs to customers (69%)
- Improving productivity (68%)
- Focus on energy efficiency improvements (46%)
- Increase investment in automation (31%)
- Freeze recruitment (28%)
Energy efficiency is one of the easiest and most affordable ways to mitigate high energy costs by reducing consumption. It also goes in tandem with the efforts to reduce carbon emissions.
It is anticipated that energy efficiency standards for commercial buildings would increase over the coming years as part of the UK’s plan to reach net zero.
Faced with both, a challenging business climate and higher regulatory standards, businesses have an opportunity to innovate for energy saving solutions.
Energy efficiency offers tangible financial benefits. According to the Carbon Trust, a 20% cut in energy costs represent the same bottom-line benefit as a 5% increase in sales [11].
Related articles
Third party costs - what are they and recent changes
Additional information
[2] Office for National Statistics (ONS) Consumer price inflation, UK: December 2024, 15 January 2025
[3] Bank Rate maintained at 4.75%, Bank of England December 2024
[4] UK economy: Stagflation concerns persist after worrying week, City AM 24 January 2025
[5] Institute of Director’s Economic Confidence Index 2 January 2025
[6] Lloyds Bank Business Barometer 23 December 2024
[7] Budget tax hike burst business confidence, The British Chambers of Commerce 5 January 2025
[9] Deloitte CFO Survey: 2024 Q4, 13 January 2025
[10] Make UK Executive Survey 2025, PwC January 2025
[11] Energy efficiency guide: Retail sector, Carbon Trust April 2018
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