UK businesses expect record price hikes to offset higher wage bills

According to an influential Bank of England survey, UK companies expect to raise prices at the fastest pace since records began to offset higher wage bills caused by a tight labor market.

Business leaders on the central bank’s decision-making body forecast in September that they would increase prices by 6.6 percent in the coming year, up from 6.5 percent in August, the highest since the survey began in 2017.

The results confirm the BoE’s concerns “that firms are finding it too easy to pass on higher costs to consumers,” said Simon Harvey, head of FX research at Monex Europe, a foreign exchange firm.

He noted that these worries helped the central bank hike interest rates by 100 basis points in its last two monetary policy meetings.

The monthly survey of chief financial officers of UK small, medium and large companies is used by the BoE to monitor developments in the economy and supports the case for rate hikes at the bank’s November 3 monetary policy committee meeting.

Markets are currently pricing in a combined 100bps hike to the current rate of 2.25% as the bank struggles to contain UK inflation, which is at a nearly 40-year high. Market expectations are for interest rates to rise to 5.7 percent by June next year.

The survey showed that business leaders are forecasting inflation at 4.8 percent over the medium term, up from 4.2 percent in the previous month’s survey.

Harvey noted that the more hawkish members of the MPC would view this “unanchoring of medium-term inflation expectations as a particular concern”.

Firms also expect wages to rise by a record 5.9 percent in the coming year, up from 5.5 percent in August. They reported that wages had already risen by 6.5 percent in September, a full percentage point more than in July.

About 84 percent said they were finding hiring more difficult than usual, down only slightly from 86 percent in August.

Levels of overall business uncertainty also rose, with more than two-thirds of respondents saying that concern about their business was “high” or “very high,” up 6 percentage points from August. Companies are less likely to invest in times of high uncertainty, which could limit growth.

In a separate survey of 5,200 companies by the UK Chambers of Commerce, almost 40 percent of companies warned they expect their profits to fall over the next 12 months. This is the worst reading since the peak of the Covid crisis in 2020.

Just a third of companies reported increased domestic sales, up from 41 percent last quarter, while more than four in five companies said inflation remains a growing concern. Almost two thirds assume that their own prices will rise in the coming months.

The BCC said the survey, conducted ahead of the government’s energy support package for businesses and its mini-budget, showed a weakening in structural business conditions and confidence from the second quarter.

One in three companies reported lower cash flow over the past three months, while less than half expected their revenue to increase over the next 12 months. The outlook is particularly bleak for the retail and wholesale sectors, which are in negative territory in the second quarter, the BCC said.

Shevaun Haviland, BCC director general, said the results “paint a worrying picture of the state of many UK companies”.

“Some companies tell us that rising costs have forced them to abandon otherwise viable projects,” she said. “The current volatility in the financial and foreign exchange markets must be addressed quickly in order to stabilize the economy again and give companies a certain planning certainty.”

Separate data released on Thursday by S&P Global/Cips showed that construction sector activity improved in September, with the output index rising to 52.3 in September from 49.2 in August.

However, Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, warned that the modest uptick in business activity was “fueled by delayed projects and easing supply shortages rather than a spate of new orders.”

“Forward-looking survey indicators deteriorated again in September as new business volumes have stalled and growth expectations for the year ahead are now the lowest since July 2020,” he said.