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Turbulence ahead: Soaring UK inflation hits IT industry spending

With UK inflation rates at their highest since 1982, tech and IT executives are nervous about the future.

By Sophia Waterfield

Rocketing inflation in the UK is creating a worrying environment for investors and executives in the tech industry. This week rates soared to 9% in May. It is the highest level of inflation in the UK since 1990.

Inflationary pressures are hindering the IT sector. (Photo coldsnowstorm/istock)

According to the Office of National Statistics (ONS), the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose to 9% in 12 months to April 2022, up from 7.8% in March. The rise from March to April of 1.6 percentage points was largest month-to-month increase since recording of national statistics started in 1989.

The government has so far resisted calls from Labour, as well as trade unions, associations and members of the tech industry to deliver an emergency budget to address inflationary pressures and the cost-of-living crisis which is hitting many households.

How does the UK inflation rate affect the tech industry?

With budgets being stretched at home, the technology and IT industry is seeing more pressure to raise salaries, which is likely to have an indirect impact on the consumer, with companies feeling the price pressure and passing that on to customers.

There is also more demand being put on the supply chain as orders are taking months rather than weeks due to stock shortages.

According to Roy Shelton, CEO of the managed services provider Connectus Group, tech companies in the UK could be worried about the higher rates of inflation and how far they could go. "Right now the big concern is just how high inflation will go," he says. "Really high levels would be a serious concern to most companies because it makes planning and investment decisions so much harder."

Shelton told Tech Monitor that higher UK inflation rates can make securing new business more difficult. This is because companies might look to hold back on new investment until inflationary pressures reduce. 

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Higher UK inflation rates put pressure on the supply chain

Stakeholders who spoke to Tech Monitor said that higher UK inflation rates are putting more squeeze on the technology and IT supply chains, causing longer delivery times and restricted access to stock.

"Access to components and core materials is also a major issue as we see supply chains struggle," says Shelton. "Cisco, Apple and other large tech companies are seeing billions wiped off of their share prices as earnings and profit warnings are issued."

Equipment costs are rising at a rate of well above 10%, says Jon Seal, managing director of software company technologywithin. "Inflation isn't the only issue we are grappling with," Seal says. "Demand outstrips supply, further pushing up the price. These materials ultimately support our digital lives, so there is turbulence ahead."

He points out that the sector's supply chain has seen supply issues for some time, and that higher demand equals higher prices, causing a "domino effect". Seal says: "Getting hold of the main brand equipment we would normally stock is a real challenge. Orders used to take a few weeks; it’s now months."

Seal adds that his company is managing this by sourcing from a wide variety of manufacturers where it's possible.

Other tech companies foresee further issues with transport delays, which could potentially push prices even higher: "I think we’re going to see an increase in product price," warns Alexa Greaves, CEO IT services provider AAG IT. "With transport delays, the increase in fuel costs and longer lead times, it squeezes margins in an already competitive marketplace."

Fuel costs have jumped this year, with ultra-low unleaded petrol reaching an all-time-high of £165.09 per litre.

Tech HR and recruiters could struggle as higher inflation means an increase in cost of living

The technology and IT industries are already finding it hard to hire due to an ongoing skills shortage, and the UK's inflation rates could also have an impact on salaries.

According to research from recruiter Robert Walters, 70% of employers in the tech industry are anticipating a shortage, with almost a quarter (24%) expecting this shortage to greatly impact their recruitment. The most sought after skillsets are in cybersecurity (56%), business insights & data management (41%) and software development (35%).

Because of this, attracting talent to a business means offering more in terms of benefits and salary. But with higher inflation rates squeezing margins, it might not be so easy for tech companies to up their offers.

"From a HR perspective, we can expect to see wage-rise pressure," says AAG IT's Greaves. "Recruitment is already hard in our sector and this will make it harder.

"Everything lags behind inflation," she continues. "Principally we’d expect a squeeze on interest rates, not just in our industry but across the board, and that’s going to put pressure across the entire business community."

'There's no simple fix'

While there are solutions to helping the tech industry, there's won't be one simple solution, warns technologywithin's Seal. "The fact is that this is a difficult and complex situation with numerous factors playing a part and sadly there is certainly no 'simple fix'," he says.

The Government should work with the Bank of England on the challenges to provide some "practical solutions," Seal argues. "The UK tech industry is dynamic and innovative and with the right decisions and interventions are poised to help our economy to recover and ultimately grow," he says.

For start-ups and SMEs, more support may be required, says Jonny Seaman, fundraising expert at SeedLegals. "The rising rates we’re currently experiencing are already taking a considerable toll on start-ups," he says. "We’re seeing these early-stage businesses struggling with the cost of operating, grappling with supply chain and shipping issues, and facing uncertain markets."

With rising tax rates added to high inflation, founders are in a tough position, Seaman explains. "VC investment slowdowns are intensifying as investors are more wary and more likely to drop out of deals or request a lower valuation," he says.

Seaman adds: “The truth is that right now, any SME or start-up owner would love greater tax deductions on business rates, a cut to energy VAT or a reversal of the national insurance increase. However, start-ups must be considered in the potential budget, in particular how they can remain afloat and thrive in a changing tide.”

Read more: Tech skills shortages delay two-thirds of digital transformation projects

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