Insight & Analysis

Taking the air out of the inflation bubble

Published: Jun 2023

As inflation rates refuse to fall, companies across all industries are adopting various strategies to minimise the impact on their cost base.

Readers of UNCTAD’s latest global trade update (published last week) would have been in doubt about the seriousness of the global inflation crisis. Despite an increase in world trade in the first six months of the year, the report predicts a fall in the second half of the year on the back of persistent inflation with commodity prices remaining above pre-pandemic averages.

Many countries are struggling to keep a lid on rising prices, but the challenge is particularly acute in the UK where shop price inflation last month reached its highest rate since industry records began in 2005.

In its latest annual report, Halfords observed the recent spike in UK supply chain and consumer inflation was creating challenging economic conditions and unless it continued to mitigate the significant levels of cost inflation – through cost mitigation and savings, growth in new business areas, and increasing selling prices – it would be unable to maintain a sustainable business model.

One of the company’s priorities is fixed cost contracts for inflationary cost categories such as freight and utilities.

“There is no doubt the economic environment for UK companies has become tougher than six months ago,” said Loraine Woodhouse, Chief Financial Officer at Halfords.

A UK business tracker report published by data and market research company Savanta covering the month of April found that responding to the impact of inflation and wider rising business costs was the priority of 91% of the businesses surveyed, with 60% already experiencing a decline in demand.

At the announcement of Morrisons’ latest quarterly trading results, the supermarket’s CEO David Potts said, “inflation remains disappointingly and stubbornly high” but the company had “continued with our programme of large-scale price cutting campaigns, complemented by quick, tactical price cuts in areas where we can see the early signs of inflation easing.”

Earlier this week, Eoin Tonge, Finance Director at Associated British Foods, said while there were signs of inflation easing from a cost point of view “it is still a very high inflationary environment and there is still quite a bit of volatility – for example, wheat prices have been moving around quite a lot over the last few weeks – and obviously labour inflation is very high and we see that maintaining.”

The company attributed a decline in its group margin in the first half of its financial year to not passing on the full impact of inflation to consumers in the form of higher prices.

It’s a similar story on the other side of the Atlantic. Cruise operator Carnival this week forecast lower than expected third quarter profits with Chief Financial Officer David Bernstein explaining that a lower than anticipated fall in the cost of port expenses, freight and crew travel was behind the reassessment.

A quarter of the US business owners surveyed for the National Federation of Independent Business (NFIB) small business optimism index in May reported inflation was their single most important problem in operating their business.

On a seasonally adjusted basis, almost one-third of the business surveyed raised their average selling prices last month, with price hikes most commonly implemented in the retail, wholesale and construction sectors.

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