Inflation rises again: what could it mean for your business costs and borrowing?

What does this mean for your business?

With inflation at 2.9%, the headline rate does not necessarily reflect the cost increases your business is experiencing. Consider:

• Review your costs: Identify where your biggest increases are coming from and how they are affecting your margins.
• Review your pricing: Consider whether your current prices remain sustainable as your costs change.
• Plan your cash flow: Forecast upcoming commitments, including tax liabilities, payroll, supplier payments and loan repayments.
• Check your borrowing: Review existing finance arrangements and consider how changes in interest rates could affect future repayments.
• Stress-test your finances: Consider what would happen if costs increased further or sales were lower than expected.

What does the latest inflation figure mean?

With UK inflation remaining above the Bank of England’s 2% target, businesses may be facing renewed pressure on costs, margins and borrowing. But the headline inflation rate does not necessarily reflect the experience of individual businesses.

UK inflation rose to 2.9% in July 2026, up from 2.6% in June, according to the Office for National Statistics (ONS). While this is significantly lower than the levels seen during the recent inflationary period, prices are still rising and businesses need to consider how this could affect their finances and future plans.

It is important to remember that this headline figure is based on the Consumer Prices Index (CPI), which measures changes in the prices of goods and services purchased by households. As a result, it does not necessarily represent the rate of inflation experienced by an individual business.

The Bank of England has also indicated that inflation could rise further later this year, partly because of higher and volatile energy prices and their knock-on effects.

For businesses, the impact of inflation can extend well beyond the headline figure and vary considerably from one business to another. A business with high energy usage, for example, may be experiencing much greater cost increases than the headline CPI rate suggests, while a professional services business with relatively low energy consumption may be affected differently.

Staffing costs, rent, raw materials, energy, insurance, transport, technology and supplier pricing can all move at different rates. Your business may therefore be experiencing a significantly higher or lower increase in its own costs than the headline inflation figure.

This makes it important to look beyond the national inflation rate and understand what is happening to your own costs and margins.

Rising costs can put pressure on margins

Inflation can increase the cost of many of the inputs a business relies on, from energy and raw materials to rent, insurance, software and professional services.

Even relatively modest increases can have a noticeable effect on profitability, particularly for businesses operating on tight margins.

It may therefore be worth reviewing your key costs and identifying where increases are having the greatest impact. Understanding your gross and net margins can help you assess whether current pricing remains sustainable and where changes may be needed.

Should you review your pricing?

If your costs have increased, maintaining the same prices may gradually reduce your margins.

However, increasing prices without understanding the potential impact on demand can create its own challenges. Businesses should consider their costs, margins, competitors and customers when deciding whether a price review is appropriate.

Rather than making across-the-board increases, it may be useful to look at the profitability of individual products, services or customer groups. This can help identify where pricing changes may be most appropriate.

What could inflation mean for borrowing?

Inflation and interest rates are closely connected. When inflation remains above target, the Bank of England may need to maintain higher interest rates for longer to bring price growth back towards its 2% target.

At the time of writing, the Bank Rate is 3.75%, following the Bank of England’s decision in July 2026 to hold rates at this level.

For businesses with existing borrowing, it is important to understand when loans or other finance arrangements are due for renewal and whether they are on fixed or variable rates.

For businesses considering new borrowing, higher interest costs could affect the affordability of investment, expansion or acquisitions. Before taking on additional debt, it is worth considering how repayments would affect cash flow under different scenarios.

Don’t overlook the cost of late tax payments

Borrowing costs are not limited to loans and finance arrangements. Businesses should also consider the potential cost of falling behind on tax payments.

HMRC currently charges 7.75% interest on late payments of certain taxes, including VAT, Income Tax, National Insurance and Corporation Tax.

For a business already experiencing cash flow pressure, an unexpected tax bill can therefore become more expensive if there is not enough cash available to pay it on time. Interest can quickly add to the amount owed, making it even more important to plan ahead for upcoming tax liabilities.

Building known tax payments into cash flow forecasts can help businesses identify potential shortfalls early, rather than discovering a problem when a payment deadline is approaching.

Cash flow remains important

When costs rise, businesses can find themselves needing more working capital simply to maintain the same level of activity.

Keeping a close eye on cash flow can help you identify potential pressure points before they become a problem. This could include reviewing payment terms, managing debtor days, monitoring stock levels and regularly updating cash flow forecasts.

It is particularly important to look ahead at significant commitments, including tax liabilities, loan repayments, payroll and supplier payments. Planning for these in advance can help you avoid having to make difficult decisions at short notice or relying on expensive sources of finance.

It is also worth stress-testing your forecasts. What would happen if your costs increased by another 5%? What if sales were lower than expected? Would the business still be able to meet its commitments, including its tax liabilities?

What should businesses do now?

While no business can predict exactly how inflation or interest rates will develop, there are practical steps you can take to improve your resilience.

Consider:

• Reviewing your key costs and supplier contracts: Identify which costs are rising fastest and consider whether these increases are temporary or likely to continue.
• Understanding your own cost inflation: Look at how your business’s specific costs are changing rather than relying solely on the headline inflation rate.
• Reviewing your pricing: Check whether your current prices continue to provide the margins you need while remaining appropriate for your customers and market.
• Updating cash flow forecasts and budgets: Include upcoming tax liabilities, payroll, supplier payments and loan repayments so you can identify potential pressure points early.
• Reviewing existing borrowing: Consider upcoming refinancing requirements and whether changes in interest rates could affect your repayments.
• Stress-testing your finances: Model different scenarios, such as higher costs, lower sales or increased borrowing costs, to understand how resilient your business would be.
• Looking for efficiency opportunities: Identify areas where processes, spending or resource use could be improved without compromising the quality of your products or services.
• Taking advice where needed: Before making significant borrowing, investment or pricing decisions, consider whether professional advice could help you understand the potential financial impact.

Inflation may be outside your control, but the way your business responds to changing costs and financial conditions is not.

If you would like to discuss your business’s financial position, cash flow or plans for growth, our team at Burgess Hodgson can help. Get in touch with us to discuss how you can prepare for changing economic conditions.