Inflation jumps to 3% – business industry reaction

According to the Office for National Statistics, inflation jumped to 3% in January, up from 2.5% in December, marking the highest level since March last year. 

The increase was driven primarily by increases in the cost of transport, food, and non-alcoholic beverages (The Times). Private school fees were also a factor, rising by almost 13 per cent, and the typical dip in airfares seen at the start of each year was muted, seeing the weakest fall in five years.

Forecasters from the Bank of England have predicted inflation to increase to 3.7 per cent this year due to rises in energy prices and utility bills.

Commenting on inflation figures for January, ONS Chief Economist Grant Fitzner said “Inflation increased sharply this month to its highest annual rate since March last year. The rise was driven by air fares not falling as much as we usually see at this time of year, partly impacted by the timing of flights over Christmas and New Year. This was the weakest January dip since 2020.

“After falling this time last year, the cost of food and non-alcoholic drinks increased, particularly meat, bread and cereals. Private school fees were another factor, as new VAT rules meant prices rose nearly 13% this month.”

Dr. Roger Barker, Director of Policy at the Institute of Directors, said “This is a higher inflation rate for January than most economists were expecting. Most anticipated an uptick from last month’s figures due to changes in the way transport costs were being incorporated into the index. However, unanticipated inflationary pressures also appeared in food and non-alcoholic beverage costs and in the education sector. Worryingly, services inflation showed remarkable resilience, rising to an annualised rate of 5% (from 4.4% in the previous month).

“This month’s figures add to the uncertainty around the UK inflationary outlook. In April, the private sector must determine its response to significantly higher employment costs, and this may well push up consumer prices.  The latest figures also cast doubt on the pace of future interest rate cuts, which the Bank of England may choose to delay due to the persistence of inflationary pressures. The worst-case scenario for UK business is stagflation, combining high inflation and low growth. January’s inflation figures have done little to mitigate the risk of this outcome.”

Paul Noble, CEO of Chetwood Bank, said: “After today’s result, the hope for inflation coming back under control seems short-lived. For Britons, this is a troubling setback, with households once again facing rising costs just as they were starting to stabilise. With that rate of inflation forecast to rise further before easing, uncertainty remains high.

“While factors driving the uptick – VAT changes and seasonal price shifts – were expected, these offer little comfort as concerns grow over the economy’s fragility. The Bank of England now faces a difficult balancing act. Having recently cut interest rates, policymakers may now be forced to reassess their approach. If inflation remains stubborn, further cuts could be delayed, prolonging financial strain for borrowers and businesses. However, keeping rates higher for too long risks deepening economic stagnation in stark contrast to the stable growth many are seeking.”

Mike Randall, CEO at Simply Asset Finance said “With business costs already at a notable high, an increase in headline inflation will further squeeze UK SME margins as they look for avenues to grow in 2025.

“As many businesses now prepare for an increase in National Insurance and Living Wage costs in April, mitigating cost pressures while unlocking their success will rely on creating a clear roadmap to fuel their growth.

“Infrastructure investment plays a crucial role in supporting the future of these businesses, but so far, the Chancellor’s recent speech on growth and infrastructure has done little in the way of immediate support. With 19% of SMEs planning to invest in their business this year following greater clarity in the Autumn Budget, government initiatives and funding to boost SME productivity will be crucial in unlocking economic potential.”

Neil Rudge, Head of Banking for Commercial at Shawbrook, said “The uptick in inflation this January will be disappointing for SME leaders already grappling with significant challenges—including a stagnant economy and the upcoming increase in employer NICs this April. These pressures, combined with uncertainty around potential tariffs for businesses trading internationally, create a volatile landscape that makes planning increasingly difficult.

“On a more positive note, the Bank of England’s recent interest rate cut signals a shift towards a more supportive borrowing environment for SMEs. With expectations of gradual, continued reductions, this provides businesses with greater confidence in their financial planning. However, an uptick in inflation could disrupt these expectations, potentially delaying further cuts and impacting business confidence. In such a challenging economy, having a trusted lending partner that offers flexible solutions is crucial, ensuring businesses have the support they need to navigate uncertainty and seize growth opportunities.”

George Lagarias, Chief Economist at Forvis Mazars said “Inflation returning to 3% should, oddly, not be too alarming.  The Bank of England tends to dismiss energy and food cost spikes, which contributed the most towards price rises, and prefers to monitor the more “sticky” parts of inflation, like wages. Yesterday, despite higher wages, Andrew Bailey was optimistic about containing wage growth going forward. If food and energy price spikes don’t repeat too often, which would suggest a problem in supply chains due to global policy uncertainty, then last month’s inflation number will likely not deter the BoE from cutting rates going forward.”

Suren Thiru, Economics Director at ICAEW said “These figures confirm a disheartening rebound in inflation as rising air fares and the introduction of VAT on private school fees contributed to notably widen the gap with the Bank of England’s 2% target.

“In the coming months, the only way will be up for inflation, with higher energy costs from April, the looming national insurance rise and global trade frictions likely to lift the headline rate close to 4% by the summer.

“While it will make for awkward reading for rate setters, rising services inflation could eventually slip into a more consistent downward trajectory if the squeeze from loosening labour market conditions filters through into weaker wage growth.

“This increase means that a March rate cut currently looks improbable. With inflation headwinds mounting, including April’s major rise in business costs, a May loosening – while still likely – is not yet a foregone conclusion.”