UK businesses have come under intense pressure to push up prices this month after experiencing the fastest rise in production costs on record.
Strong commodity price hikes, rising fuel costs and strong wage demands in November combined to raise the average cost burden at the fastest pace since 1998, when comparable records began.
According to an IHS Markit monthly survey, while all companies in the private sector have been equally affected by rising input costs, only manufacturers have responded by stepping up the pace at which they are raising their own costs. The price of manufactured goods has increased at the highest rate in 20 years.
Firms in the service sector indicated that, on average, they were unable to pass on all the additional costs after strong resistance from customers.
Analysts said mounting cost pressures would likely give the Bank of England further impetus to raise interest rates at its next meeting in December.
Several officials of the banks’ Monetary Policy Committee (MPC), including Governor Andrew Bailey, have hinted that a rate hike is imminent to calm rising inflation.
Samuel Tombs, UK chief economist for Pantheon Macroeconomics, said survey evidence showing companies continued to benefit from high demand and increasing employment will reassure hesitant MPC members that the economy may support a slight increase in interest rates at its next meeting on December 16.
Chris Williamson, chief economist at IHS Markit, said: A combination of sustained business growth, further labor market gains and record inflationary pressures gives the green light for an interest rate hike in December.
There is intense speculation among investors that the central bank will raise the base rate from its pandemic emergency level from 0.1% to 0.25% before a further increase to 0.5% next February.
The IHS Markit / Cips flash composite exit index registered 57.7 in November, down slightly from 57.8 in October, but well above the average of 56.3 seen in the third quarter of 2021. An index greater than 50 indicates expansion.
Survey respondents generally commented on the increase in customer demand due to improving economic conditions and the continued strengthening of the rollback of pandemic restrictions, IHS Markit said.
Tombs said other surveys have revealed a picture more consistent with Office for National Statistics (ONS) surveys, which show the economy is slowing as the end of the year approaches.
For example, we estimate, from the ONS Business Insights and Conditions survey, that companies’ turnover was 1% lower than normal in the four weeks to November 14 than in the two weeks preceding October 3.
In addition, the risk of the economic recovery stalling for a few months in the face of a winter wave of Covid-19 cases remains uncomfortably high, he added.
Economists also pointed to government measures to cut spending and raise taxes which, combined with higher inflation, will affect real household incomes over the next year.
The outlook for real household disposable income to decline over the next year, as businesses pass higher costs on to consumers and higher taxes, also suggests that the economic recovery will not improve the pace. of the third quarter, Tombs said.
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