With inflation jumping to 2.6 per cent, is it time to start discussing “greedflation”? This was a hot topic a year ago when critics said companies were failing to pass on the falling costs they were benefitting from as inflation came down. Even the Bank of England voiced concern.
Of course, now businesses are complaining loudly about their costs rising as a result of Rachel Reeves’ budget, in which the Chancellor raised their national insurance contributions (NICs). We’ve heard repeated warnings that this will lead to job cuts and, crucially, higher prices.
But the tax increase doesn’t take effect until April. So does inflation hitting an eight-month high tell us they’re getting started early to flatter their profits in the interim?
The increase to 2.6 per cent in the Consumer Prices Index (CPI) for the year to November, compares with October’s 2.3 per cent. The number dipped below the Bank of England’s 2 per cent target as recently as September when it came in at1.7 per cent. But that is now a distant memory.
Core inflation, a measure of the underlying inflation in the UK economy, which excludes volatile categories such as food, fuel and booze, also ticked up to 3.5 per cent from 3.3 per cent.
With the economy battling through thick sludge and shrinking for the second straight month in October, was there anything for the optimistically inclined to grab hold of? Well, while service price inflation remains elevated, at least it didn’t rise, instead holding steady at 5 per cent. So there’s that. And the rise was bang in line with economists’ expectations. Is it churlish to say that even stopped clocked tells the right time twice a day? Perhaps it is.
According to the Office for National Statistics (ONS), the worst damage was done by motor fuel oil and clothes prices, which fell in 2023 but rose this year. Meanwhile, the rate of food price rises increased to 2 per cent from 1.9 per cent. Partying is also going to leave people with an unusually nasty festive hangover: the alcohol and tobacco category leapt by 6.9 per cent. That was the biggest number in the sector breakdown, but there were plenty of other nasties in there.
A little relief came in transport (fell 0.5 per cent) and by furniture and household goods (fell by 0.9 per cent). Airfares usually fall at this time of year, but travellers have benefitted from an unusually steep drop.
But back to greedflation. The truth is that for all their honeyed words, companies will charge what they think can get away with. The risk they face is that if they push too hard the consumer may baulk. Even a mega-brand like Apple has had to confront this, with consumers becoming less willing to upgrade their devices as the price of an iPhone continued to rise. Apple’s margins are stellar.
However, everyone knows about the tax rise, and there has been a constant drumbeat from companies about how hard done by they are and how they will have to raise prices. This gives them cover; it is easier to get away with hitting the consumer in the pocket if they’re primed to expect it. We’re being softened up. I wouldn’t be at all surprised if a number of them try it on.
Of course, this will only make the job of the Bank of England – charged with controlling inflation – harder if it wants to keep the CPI within sight of its 2 per cent target.
These latest figures put the final nail in the coffin of any lingering hopes of a December interest rate cut (we’ll get the verdict tomorrow). If I’m right about greedflation and companies getting in early ahead of the April tax rise to put some extra juice into their profits, then a cut in February, when the rate-setting Monetary Policy Committee holds its first meeting in 2025, may be off the agenda too.
This will, obviously, hit the corporate sector by keeping its financing costs higher. But I don’t imagine those charged with setting prices will think about the bigger picture while they’re at their desks dreaming of dividends and bonuses.
I’ve said before that while the chancellor clearly needed to raise money, accomplishing the lion’s share of it through taxing jobs was not the best way to go about it. But by the same token, I think we should take some of the whingeing from the corporate sector with a pinch of salt, especially if inflation keeps on rising as it is now.