UK businesses expect consumers to pay more as costs rise, finds BoE survey

UK businesses expect faster output price growth for the year ahead in a sign that they are passing on rising costs to consumers, according to data on Thursday that support the case for further monetary policy tightening.

A survey of chief financial officers of UK companies published by the Bank of England found that price pressures are becoming more entrenched in the economy as wage growth accelerates.

The findings come amid an intensifying cost of living crisis, with double-digit inflation and soaring energy bills hitting household finances and sending consumer confidence to its lowest level in almost 50 years.

The businesses polled expected output price growth in the year ahead to reach 6.5 per cent, up from 6.3 per cent the previous month and the highest level since records began in 2017.

The survey, which was conducted between August 5 and 19, showed that in the year to August, average unit costs were estimated to have increased 9.8 per cent, also the highest on record.

This was in part because of higher earning growth. The average wage was reported to have risen 6.4 per cent over the same period, up from 5.5 per cent in the year to July. Wage expectations for the next 12 months also rose to 5.5 per cent, up 0.4 per cent from July.

The figures are closely watched by the BoE’s Monetary Policy Committee for signs of a “wage spiral”, when earnings start to rise in response to rising prices.

They support the view that the MPC will raise interest rates for the seventh consecutive time at its next meeting on September 15. Markets have priced in a 70 per cent probability of a large 50 basis point increase from the current 1.75 per cent, with a 30 per cent chance of an even bigger increase.

Wage growth was boosted by widespread labour shortages, according to the survey. Almost nine in 10 businesses reported that it was harder than normal to recruit new employees.

As a result, business expectations of consumer price inflation for the year ahead rose to 8.4 per cent in August, up from 7.3 per cent the previous month.

High-cost pressures and selling price expectations were confirmed, despite some recent easing, by the final reading of the S&P Global/Cips UK manufacturing purchasing managers’ index.

The survey, also released on Thursday, showed that the UK manufacturing downturn deepened in August as demand from domestic and overseas markets fell sharply.

The headline index fell to 47.3 in August, down from 52.1 in the previous month and the lowest since May 2020, when the country was in a pandemic-related lockdown.

Rob Dobson, director at S&P Global Market Intelligence, said there were reports of clients postponing or cancelling agreements because of the increase in economic uncertainty caused by warnings of recession, rising prices and component shortages.

James Brougham, senior economist at the manufacturers’ trade group Make UK, said immediate intervention was “necessary to mitigate the worst of the economic damage to the industry’s fabric”.