In the fight against rising prices, Sean Hughes is willing to try anything to keep costs down at his gastropub, Dylans at The Kings Arms. That includes adding some less traditional dishes to favorites like prime rib and Scotch eggs. The latest: candied beef tongue.
His dinners, in St Albans, a relatively wealthy commuter town north of London, got over their initial hesitation, he points out, and sole, a cheaper cut of beef, became a popular choice. But that’s how his menus are now determined – at cost.
Meat prices, Mr Hughes said, have risen by a third. A 20 liter container of canola oil has risen to 38 British pounds (about $48) from £14. Breweries are raising beer prices. Labor costs have increased by 20 percent as he strives to retain staff in a competitive market. At the same time, he tries to keep the prices on the menu stable.
“It’s a very, very, very delicate balancing act right now,” said Mr. Hughes. “It’s certainly not the kind of tree recovery we were all hoping for.”
Instead, Britain is staring at the specter of stagflation, a devastating mix of sluggish economic growth and rapid inflation. A conservative lawmaker first used the word in parliament in 1965, and it was a chilling warning of what was to come in the next two decades: Unemployment soared and inflation climbed to double digits amid workers’ strikes and political instability. Since then, the grim economy of the 1970s and the prospects of stagflation returning have haunted British political leaders.
While there aren’t strong unions driving wages across the country or rising unemployment ranks like in the 1970s, there are just enough flickers of stagflation to sound the alarm.
Britain is experiencing the fastest pace of consumer price growth in four decades, with inflation at 9 percent. Economic growth came to a halt in February and declined slightly in March. The situation is expected to deteriorate with inflation peaking above 10 percent this year and the economy contracting next year, the Bank of England predicts.
Companies see problems ahead and are trying to roll back costs. Mr. Hughes keeps his cafe closed an extra day a week to save on energy costs and wages. And this is before the worst price hikes hit. He is shielded from rising gas and electricity prices by a permanent contract, but expects his energy costs to rise from £19,000 to £48,000 a year in November. At his other pub, The Boot, a stone’s throw away in St. Albans, energy costs triple.
“Rising energy prices are impacting absolutely every aspect of the business, so there’s no getting around it,” said Mr. Hughes. At the same time, he is concerned about the rising household bills that his customers have to pay. “People will have to save that money,” he said.
In the hospitality industry, demand has not declined as quickly as might be expected, says Kate Nicholls, the chief executive of UKHospitality, a lobby group that has pushed for a return to lower VAT rates, a type of sales tax. The worst, she predicts, will come after the summer. But what plagues companies is uncertainty.
“A lot of people haven’t lived or worked in a high inflation environment, so we just don’t know what the impact will be,” said Ms Nicholls. It’s unclear whether consumers will react “very strongly” with fear or continue to spend, she said.
Rising prices are hurting around the world, and recession warnings are flashing in Europe and the United States, but concerns are expressed that Britain will face more persistent problems as it faces the worst problems in Europe and the United States.
“We are acutely exposed to the European energy price shock, and like the US we have a tight labor market,” Treasury Secretary Rishi Sunak told lawmakers late last month.
A UK government cap on household energy bills is reset every six months and is expected to rise by £800 to £2,800 a year in October as households pay late for the recent rise in oil and gas costs. The jump is almost as big as the rise that happened in April. (The limit does not apply to corporate utility bills.)
While statisticians say most of the acceleration in inflation can be attributed to energy, above-average price increases extend to more goods and services. Many cost increases for businesses have not yet passed on to consumers because there is a slowdown, said Tera Allas, director of research and economics at McKinsey’s UK and Ireland office and a former government economist.
“There’s still a lot of momentum to go before all those business-to-business prices are converted into consumer prices.” she said.
Britain’s tight labor market is also fueling inflationary pressures. For the first time, there are more vacancies than job seekers. This is pushing up wages – not enough to keep up with inflation, but enough to get the central bankers in trouble. At the Bank of England, officials have been surprised by the size and continued decline in the workforce since the start of the pandemic, as long-term illness has left hundreds of thousands unemployed.
Underneath all this is Brexit. A large European labor pool is no longer easily accessible, or interested in working in Britain. During the pandemic, fueled by lockdowns, more European Union citizens have left Britain than have arrived. Companies importing goods from the continental bloc have complained that additional bureaucracy is increasing their costs, while economists at the London School of Economics say the split from the European Union has pushed food prices up by 6 percent.
Adam Posen and Lucas Rengifo-Keller of the Peterson Institute for International Economics in Washington cite Brexit as the reason Britain has higher core inflation, which offsets the initial impact of volatile food and energy prices, than other major European economies, including Germany, France and Italy.
By ending the free movement of people and raising tariffs and other barriers to European trade, they say the UK government has “created inflation”.
Companies are now making complicated calculations about how much they can drive up their prices to offset their own rising costs without driving customers away. In April, taxes and energy bills rose for tens of millions of households, and a measure of consumer confidence fell to its lowest level during the 2008 global financial crisis.
Raindrops on Roses, a gift shop in St. Albans, has been unable to stop her from raising some of its prices. For example, the price of a brand of Cornish candles rose by 22 percent. Shoppers at the store, who donate their profits to a cancer charity, are concerned for the first time about products not selling.
“We are more careful with the amount of stock we order,” says Karolina Birsen, one of the managers. “Less spontaneous, more calculated.”
According to the Bank of England, after adjusting for inflation, disposable household income is expected to fall by 1.75 percent this year. That would be the second largest drop since registration began in 1964, the bank said. There are already signs that consumer spending is losing momentum. Retail sales have fallen since last summer. In May, spending on credit and debit cards fell.
Donna Nichol opened Chloe James, a clothing store in St Albans, in 2010, when Britain had just emerged from a recession and had considerable experience running her business through adverse economic times. After the pandemic, she said, she felt she could handle anything.
But at the end of May came a serious test of her sense of invincibility – a letter from her electricity supplier. The price she would have to pay is about to be more than double.
“I don’t think I can do anything to cut costs,” Ms Nichol said. During the pandemic, she switched website hosts and garbage collectors and reconsidered her phone company. “I’ve already experienced that with a fine-toothed comb.”
In St. Albans, some 200 businesses use a WhatsApp group to support each other and share tips on how to save money, such as bartering furniture and catering supplies. Mandy McNeil, the executive director of the local Business Improvement District, which handles marketing and lobbying, said some retail and hospitality companies had told her their revenues had recently fallen 20 percent.
“We now have an abyss for some” because of rising energy and other costs, Ms McNeil said.
The Treasury poured in last month with £15bn in support for households after mounting pressure from opposition politicians and economists. Every household will get £400 off their bills in October, and millions of low-income, pensioners, or those on disability benefits will receive several hundred pounds more this year.
Even with that government support in mind, Andrew Goodwin, the chief British economist at Oxford Economics, expects consumer spending to fall in the second half of the year. But the country should avoid a recession, he said, and its outlook will improve cautiously next year.
“This is not an era of high inflation,” he said. “High inflation is temporary,” he added, as it will dampen demand and slow the economy.
In the meantime, companies are trying to weather this period of inflation, unsure whether government payments, household savings or a broad desire to enjoy life after lockdown will be enough to sustain them through price hikes not seen in a generation.
For businesses with high energy needs, such as catering establishments with busy kitchens, “we will face major problems in the new year unless we implement major reform,” said Mr. Hughes, who supports a VAT cut.
