UK small to medium sized businesses (SMEs) have been hit with record costs amid heightened price pressures.

According to the Confederation of British Industry (CBI) SME trends survey, the average unit costs in the quarter to January grew at a record pace for the second quarter in a row. This is expected to accelerate further next quarter (to 80% from 76% in January).

Average domestic prices grew at a slightly slower – but still elevated – rate in the last three months to January, falling to 40% from 47% October 2021.

Meanwhile, average export prices rose at a similar pace to last quarter’s record high to 33% from 34% in October.

The CBI anticipates both domestic (+65%) and export price growth (+43%) to accelerate further in the next three months.

The study of 218 SME manufacturers also found that output growth picked up slightly from the previous three months and is expected to grow at a broadly similar rate in the quarter. Output growth in the quarter to January accelerated to 19% from 14% in October, expected to rise to 16% in the coming three months.

Read more: UK services sector hikes prices at fastest rate in 25 years

"It’s been a challenging start to the year for SME manufacturers, with record cost growth, supply chain disruption, and labour shortages all weighing on production," said Alpesh Paleja, CBI lead economist. "Despite these roadblocks, activity has remained firm, and businesses have stepped up their investment plans.

New orders grew to 42% in January from 24% in October, reflecting a jump in domestic orders. Export orders, experienced growth at a similar pace to 7% from 6%.

Supply challenges are still expected to dampen activity going forward, with worries over the availability of skilled labour, "other" labour, and materials/components as factors likely to limit output remaining heightened (despite softening somewhat on last quarter).

Manufacturers predict total new orders growth to slow substantially in the coming quarter to 13%. Growth in domestic orders is expected to ease (+16%) whilst export orders (+11%) are expected to pick up.

CBI figures show employment in the sector grew at a slower pace to 13% from 25% in October, with expectations that growth in headcount will pick up to 33% in the next three months.

Despite a dip in business sentiment over the last quarter, investment intentions for tangible and intangible assets in the next 12 months (compared to the previous 12 months), strengthened.

Additionally 84% of respondents said they had sufficient capacity to at least meet demand, an improvement from last quarter’s record low (70%).

“The government must continue to work with business to tackle immediate barriers to growth. They must also put forward more ambitious plans to incentivise investment, to boost the longer-term growth potential of the economy," Paleja added.

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