Deflation reduces small business costs

The cost of operating a small firm has dropped as deflation replaces inflation during the deepening of the economic downturn.

New research, carried out by Warwick Business School for the latest More Than Business inflation guide, revealed that reductions in the price of fuel and raw materials saw small business costs fall by 2.9 per cent in the last quarter of 2008.

The index measures 20 of the most important items on which small firms spend money. According to the index, energy prices were down by 18.3 per cent, raw material costs dropped 11.5 per cent and insurance slid by 2.8 per cent for the final three months of the year.

However, the fall in prices was not sufficient to counter the effects of inflation in the earlier part of 2008, and overall small business costs rose by 3.6 per cent.

While deflation may be saving on overheads for many small firms, the risk is that the benefits are being offset by weak consumer demand and subdued trading.

Mike Bowman, head of More Than Business, said: “Small businesses now have to quickly adjust to this deflationary environment with some benefiting more than others.

“Deflation will come as good news for transport and haulage contractors as they will see fuel costs come down due to a sharp fall in oil prices. However, deflation is bad news for businesses that have their assets tied to property or large amounts of stock already purchased as it will be losing value day by day.”

Stephen Roper, professor of enterprise at Warwick Business School’s Centre for SMEs, added: “Small businesses will continue to experience deflation over the next quarter as the UK economy continues to weaken.

“As a short-term benefit deflation will provide a much needed pressure valve for small businesses which are currently very cash constrained.”