Inflation stuck at 2.8% but small firms face a very different reality

Inflation may have held at 2.8%, but many small business owners will wonder which economy the statisticians are talking about. While lower food prices helped keep the headline rate under control, businesses are still battling rising fuel costs, expensive energy contracts, higher wages, increased National Insurance bills and growing supplier charges. For manufacturers, hospitality firms, tradespeople and retailers, the real cost of doing business is rising far faster than the official inflation figure suggests. The Chancellor may welcome the latest numbers, but for millions of small and micro businesses the inflation squeeze is far from over.

Inflation stays at 2.8% - for how long and for whom?

Photo by Joachim Schnürle on Unsplash

Inflation remained at 2.8% this month. That’s a big relief for the Chancellor. Most economists were expecting the rate to rise as the Middle East conflict ground on. We’re still well above the 2% the Government was hoping to reach by April, before the Middle East conflict started, and it is still pushing up fuel and transport costs.

However, 2.8% is the CPI, Consumer Price Index. CPI measures consumer prices, not business costs. There’s not much relief for small and micro businesses, which continue to face an inflation rate far above that headline figure. The underlying pressures hitting small businesses are still tough and are likely to stay that way for some time, as it will take months for fuel and energy prices to resettle.

What’s driving inflation at 2.8%?

Inflation stayed at 2.8% because slower rising food prices offset rising transport and fuel costs. According to the Office for National Statistics the main reason inflation is still too high is:

• Transport costs, especially air fares, vehicle taxes and petrol prices

• Higher fuel prices driven by the Middle East conflict and the closure of the Strait of Hormuz, which pushed up oil and chemical costs

• Rising raw material costs, especially chemicals, for manufacturers

These were balanced by:

• Lower food prices, particularly meat, dairy and vegetables

• Lower domestic heating oil costs after previous spikes

The 2.8% figure may not a sign of stability, however because there’s still a temporary balancing act going on between slower food price increased (food is rising at the slowest rate for nearly 18 months) and rising global energy‑related costs.

Can we breathe a sigh of relief?

Economists still think the improvement is temporary and inflation is likely to rise again later this year as the Middle East conflict continues to push up global energy and fuel prices.

• The Iran war is still expected to push prices up through the year

• Motor fuel prices are rising at the fastest pace since 2022

• The Bank of England expects inflation to be higher later this year as energy price rises feed through the economy

The Bank is warning of “material second‑round effects”. That’s a grand sounding phrase which just means that higher energy costs will push up the cost of everything else including wages and prices and that will keep inflation higher for longer.

While the Chancellor can claim a political win for now, the underlying pressures are still with us and worsening.

The underlying reality for small & micro businesses

Small and micro businesses experience a completely different inflation reality from the headline Consumer Price Index. Their rate of inflation is often double or triple the official rate because CPI does not reflect the costs faced by small firms.

Energy and fuel inflation is far higher for small businesses

Even though domestic energy bills fell, business energy bills didn’t. Small businesses still have:

• higher electricity and gas prices

• rising fuel and transport costs

• higher supplier delivery charges

• surcharges linked to global oil prices

These are the categories being pushed up by the Middle East conflict.

B. Input costs for small manufacturers and trades are rising

ONS data shows raw material costs, especially chemicals, are rising sharply. This hits:

• small manufacturers

• construction firms

• florists

• cleaning companies

• food producers

These sectors face inflation far above 2.8%.

C. Supply chain inflation is still baked in

Small firms report:

• higher wholesale prices

• higher minimum order quantities

• higher shipping and freight costs

• longer lead times

These pressures don’t show up in CPI but hit small businesses directly.

D. Wage inflation is still biting

Small businesses have to factor in:

• higher National Living Wage

• higher employer NI contributions

• pressure to match wage expectations

• competition from larger employers

For sectors like care, hospitality, and retail, that need human beings, wage inflation is the main reason for higher costs.

E. Borrowing costs remain high

Interest rates are still at 3.75% and small businesses face:

• expensive overdrafts

• costly asset finance

• tight credit conditions

This push up inflation for businesses even if Consumer Price Index is falling.

4. The real small business inflation rate

While CPI is 2.8%, the effective inflation rate for small firms is often:

• 6–12% for energy‑intensive businesses

• 8–15% for small manufacturers

• 10–20% for hospitality and food businesses

• 5–10% for service‑sector firms

This is because CPI measures consumer prices, not business costs,

While the Chancellor may be breathing a sigh of relief now, small businesses can’t do so yet. Inflation at 2.8% masks the reality that global energy pressures are rising and fuel and raw material costs are surging. Energy support doesn’t reach small businesses, and they face a cost environment far harsher than households. Eventually that higher inflation for businesses forces them to put up prices so customers start noticing everything costs more.