UK businesses calculate cost of soaring inflation

Last week his drinks supplier told Jon Fletcher, general manager of the Grange Hotel near Sherborne in Dorset, that prices would rise by an average of 12 per cent this year, punishing a new wave of cost increases.

“Everything is going up,” said Fletcher, who has had to absorb similar increases in laundry costs and wages, and has been warned that his energy bills will increase significantly. “It all adds up; some of it is pretty big.”

British companies have warned that the risk of their recovery from the pandemic could be undermined by rising inflation, as they face a dilemma over what percentage of their costs to pass on to consumers.

Glenn Turner, owner of Gloucestershire-based Brightfusion, which makes science toys and motors, was forced to raise prices by 6 per cent last year, the first increase for certain products in 20 years. He is already planning his next rally later this year.

Glenn Turner: “I’ve never experienced price hikes from all walks of life before. . . supplies, postage, wages, energy, it’s comprehensive” © Anna Gordon/FT

“You worry about how price increases will affect your sales — and ultimately your business,” said Turner, who also runs Maidenhead-based Kontax Engineering.

“I’ve never experienced price increases from various business units before. . . supplies, postage, wages, energy, one size fits all. We know we’ll also increase taxes in the future. I’m losing money on some products due to increased costs.”

UK inflation rose to 5.4% in December, the highest level in 30 years. Economists said this was driven by a wide range of factors, but underpinned by the central bank’s policy decision to keep interest rates low and pump cash into the economy to help mitigate the impact of the pandemic.

Line graph of CPI inflation (annual percent change) that economists expect UK inflation to peak in spring

The energy crisis, labor shortages leading to higher wages and global supply chain disruptions leading to higher transportation and distribution costs have added to the resulting inflationary pressures on consumer and business spending.

Goldman Sachs UK chief economist Stefan Ball said the bank had raised its inflation forecast for this year to 7.2% from 5.7%. “This is a significant increase and it will be felt. We are now assuming that the Bank of England will raise rates in February and May.”

Tony Danker, director-general of the CBI’s business lobby, said inflation was the main risk to the economic recovery and had become a top concern for most companies.

“Input costs are followed by higher wage expectations, coupled with energy prices, there has to be some cost,” Danke said, calling on ministers to help ease the “cash crunch” for small businesses and act on energy costs.

“It either means more price hikes and a bigger hit to consumers, or less investment due to lower margins and a deteriorating supply side.”

Year-on-year growth in materials and fuel prices (%) Line chart showing input prices paid by UK manufacturers have been rising at a record pace

Different industries are being affected by all kinds of cost increases – from wages in hospitality to raw materials and transportation in manufacturing and retail.

Russell Weston, managing director of Snowbee, a Plymouth-based design and manufacturing company specializing in fishing gear, said the biggest expense item was “extraordinary” fees levied by shipping companies.

Russell Weston: “They’re all charging anything they can get away with” © Snowbee

“They’re all charging whatever they can get away with,” he said, noting that the cost of shipping a container from Asia has risen to £9,500 from £1,650 before the pandemic.

Energy costs have doubled, he added. “It’s absolutely deadly. It affects every consumer product that comes into this country, and it affects consumers. There will be no more cheap refrigerators.”

But Fletcher said the company could only pass on some of the increased costs. “We will raise prices, but it will be difficult to raise food and beverages to a level where they can absorb the cost. People will only spend so much on a pint.”

Inflation is hitting businesses of all sizes, although many large companies are better able to withstand price shocks than smaller competitors with fewer financial resources and often unable to pass on price increases to consumers.

Nearly three-quarters of small business owners say inflation is the top economic concern in 2022, a survey by small business lender Iwoca found.

Nonetheless, the results of the big listed UK companies this month have begun to show just how broadly rising prices will have on UK plc.

Retailers from Sainsbury’s, DFS and Dunelm to Topps, B&M and Asos have warned of rising operating costs. M&S said food inflation rose to 3.5% in December itself from 2.7% in the 12 weeks to December, but added that it had not yet passed on most of that to customers.

Clothing retailer Next has warned that prices will rise 6% in the second half of the year due to higher shipping costs and wages. Topps Tiles said it has started to pass on costs from higher shipping costs and commodity inflation, but “we do expect a modest percentage reduction in gross margin as the percentage increase in selling price will be lower than the cost price”.

The hotel industry is also suffering. Greggs, the bakery chain, said inflationary pressures from both ingredients and labor were rising through the end of 2021 and could remain elevated in 2022. Hotel and restaurant group Whitbread said it expects inflation to hit 7% and 8% in 2021 at a cost of around £1.4bn. The construction industry is also under pressure, with homebuilder Persimmon warning of a more than 5% rise in material prices.

Investors worry that rising inflation will mean a hit to earnings or a drop in value by sector, leading to a slide in company valuations.

Nick Mox, investment director at the Wellcome Trust medical research charity, said inflationary pressures would lead to the toughest picture for investment markets since the last financial crisis.

He warned of further pressure in the year ahead, with businesses also bearing the burden of rising state insurance costs in April. “We’re now in a world where inflation may be more entrenched; that’s going to be hard to turn around.”

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