Inflation falls sharply to 4.6%, but how will this affect M&A and investment activity?

The Office for National Statistics (ONS) today announced a sharp drop in inflation to 4.6%, lower than the economists prediction of 4.8%.

Falling to its lowest level since June of last year, the government continues to push towards the Bank of England’s (BoE) target rate of 2%.

Claire Trachet, CEO and founder of business advisory, Trachet, highlights the implications of a fall in inflation for this year’s investment outlook and how this will affect startups, the tech sector and investors alike.

She said, “Sharply decreasing inflation, coupled with a second consecutive interest rate hold shows a steadying of the ship after what has been a volatile economic period for the UK’s investment ecosystem.

“Inflation’s complex influence on everything from the cost of capital to asset valuations has been causing companies with limited cash reserves to find it increasingly difficult to secure funding.

“The current economic climate has presented major challenges for companies with limited cash reserves. Despite falling inflation and an interest rate hold, when you combine the current rates with an IPO market that shows no signs of revival, scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding.

“This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and I expect this to result in a growing number of down rounds..

“As the challenges of inflation are met with readiness and adaptation, optionality in deal-making is likely to increase in the immediate future.

“More than anything, this underscores how businesses looking to effectively navigate these turbulent times must have a thorough awareness of the inflationary landscape, whether it be for strategic considerations, valuation, or deal structuring. Those that do possess this understanding will be looking toward the horizon expecting significant opportunities in their way as this year comes to a close and we move into 2024.”