Introduction: Investors push large consumer firms over price hikes
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Major goods makers are under pressure to rein in price rises, after UK inflation stuck in double-digit levels last month.
Yesterday’s news that UK consumer prices climbed by 10.1% in the year to March, with food prices rocketing 19%, has focused attention on ‘greedflation’, the process where firms use rising costs and supply chain bottlenecks as an excuse to pump up their profits.
Yesterday, Dr George Dibb, head of the Centre for Economic Justice at the IPPR thinktank, suggested authorities should take a closer look at corporate profits.
“While families struggle to make ends meet, some companies continue to make higher profits from these price hikes, ignoring the impact on consumers.
It’s time for policymakers to look at ‘greedflation’ and prioritise reining in corporate profits, instead of blaming workers’ wages for driving up inflation.
Major consumer goods makers have been hit by rising energy costs and commodity prices, and also lifted wages as workers sought protection from inflation.
Profit margins have been protected by price hikes, though.
Unilever, for example, recently reported underlying sales growth of 9.0% for 2022, driven by price growth of 11.3%. Volumes declined 2.1%, suggesting that many consumers swallowed these price hikes on goods such as Dove, Ben & Jerry’s and Marmite.
But now, wholesale energy prices are much lower than early in the Ukraine war, and supply chain problems are easing after China ended pandemic restrictions. And some investors are now pushing corporates to ease their price increases.
Tineke Frikkee, a fund manager at Unilever and Reckitt investor Waverton Asset Management, told Reuters:
“What have (price hikes) done to volumes and thus to margins? What has that done to their market share as competitors may be pricing lower and gaining share?”
Frikkee added that companies should instead be investing in product innovation, saying:
“Price rises should gradually decelerate as input costs do the same.”
Supermarkets, who must choose whether to pass on these increases to shoppers, or absorb it into their margins, will be pushing goods makers to hold back on price rises.
Andrew Choi, a portfolio manager at San Francisco-based Parnassus Investments, explains:
“Staples companies are getting pressure to ease up on price increases because it hurts foot traffic for retailers, and some retailers have a lot of leverage.”
Tesco blamed “significant operating cost inflation” as it reported a halving in profits last year, with inflation forcing consumers to cut back.
Wednesday’s UK inflation report showed that food and non-alcoholic beverages costs are up 19.1% over the last year, while restaurants & cafes have put their prices up by ‘just’ 10.4%. That suggests supermarkets have found it easier to persuade customers to swallow higher prices.
Wholesale food prices worldwide have been falling since their surge after the invasion of Ukraine, according to the UN, but this is not yet noticable in UK shops.
As the Office for National Statistics told the BBC.
“You would expect to see [global food price falls] reflected in supermarkets but we’re not there yet.”
Helen Dickinson, chief executive of the British Retail Consortium, predicts that food price inflation is likely to slow in the coming months.
The BRC said:
“As food production costs peaked in October 2022, we expect consumer food prices to start coming down over the next few months.”
Consumers will hope they’re right….
The agenda
-
9.30am BST: Realtime UK economic activity and business insights data
-
10am BST: Eurozone trade balance for February
-
12.30pm BST: ECB Monetary Policy Meeting Accounts
-
1.30pm BST: US weekly jobless figures
Key events
Improved profit margins have helped retail chain WH Smith to boost its earnings.
Wh Smiths, which operates stores at travel hubs and on the high street, has reported pre-tax profits more than doubled to £45m in the six months to 28 February, up from £14m a year ago.
It benefited from the return of travellers to airports and train stations, as well as “improved margins”.
Revenues across the group rose by 41% to £859m, up from £608m.
Carl Cowling, group chief executive of WH Smith, said:
“We have seen a strong performance in the first half of the year, further strengthening our confidence in the prospects of our global travel business.
Price rises have lifted revenues at consumer healthcare group Haleon.
Haleon, which was spun out of pharmaceuticals group GSK last year, has reported “strong” trading in the first quarter of this year. Organic revenue has grown by 9.9%, with price +7.1%, and also volume mix +2.8%
Haleon’s brands include Sensodyne toothpaste, Panadol painkillers and anti-inflammatory gel Voltarol.
Its respiratory health division recorded particularly strong revenue, due to a continued strong cold and flu season.
Thanks to this strong start to the year, Haleon expects its full-year organic revenue growth will be towards the upper end of its guidance range of 4-6%.
Shares have hit a record high this morning, at 350p, having floated at 330p last summer.
Discount retailer Pepco is benefiting from increased demand from cost-conscious shoppers in the cost of living crisis.
Pepco, which owns Poundland in the UK and the Pepco and Dealz brands in Europe, reported a 22.8% rise in revenue in the last six months.
Sales were boosted by new store openings, with 166 new outlets added in the period.
But stripping that out, like-for-like (LFL) revenues were up 11.1% in the first half of its financial year.
Poundland Group grew its like-for-like sales by 4.9% .
Trevor Masters, CEO of Pepco Group, said demand remained strong during the last quarter:
“Pepco has recorded an encouraging second-quarter trading performance against the backdrop of a continuing inflationary environment for both customers and the business.
Larry Elliott: Companies must show restraint on price rises
Larry Elliott
Inflation is proving hard to shift, and that spells big trouble for a government fast running out of excuses for why the cost of the weekly grocery shop is rising at its fastest rate since 1977, our economics editor Larry Elliott writes.
Global energy prices have collapsed, and the price of food on international commodity markets is coming down too, so it’s hard any longer to blame Vladimir Putin for inflation being so sticky. Nor is it immediately obvious why junior doctors should be the fall guys.
Despite attempts by ministers to finger workers for the persistence of the cost of living crisis, there is no real evidence that this is the case. Both the International Monetary Fund and the European Central Bank have looked at whether higher wages are driving up prices, and neither of those august bodies thinks that is happening.
What they have found is that companies have been able to use the crisis to drive up prices and boost profit margins. The IMF and the ECB wouldn’t put it in these terms, of course, but both support the idea that companies are gouging their customers when they can. The non-technical term for what is going on is greedflation…
More here:
Saunders predicts one more interest rate hike
Michael Saunders, a former policymaker at the Bank of England, predicts inflation will force one more increase in UK interest rates, next month.
Saunders told Radio 4’s Today Programme that the surge in energy prices was the overwhelming factor driving up inflation, pushing up household bills, business costs, and food production prices.
But Saunders hopes that we are “now, just about, finally at the turning point”, and that inflation will fall “pretty sharply” over the rest of this year.
The BoE’s target is to keep inflation at 2% in the medium term.
Saunders predicts the Bank’s monetary policy committee will vote to raise interest rates in May, for the 12th time in a row, from 4.25% to 4.5%. But that could be a “final hike”, he predicts, followed by a long period where interest rates are fairly stable.
He says:
I think they’re probably almost done now….
The big tightening cycle, of interest rates going up meeting after meeting, I think that’s largely over.
The money markets, though, show investors predict rates could rise to almost 5% by the end of this year.
The president of the National Farmers’ Union (NFU) has said energy and food costs are “unprecedented” in her lifetime as soaring food costs continued to push up inflation.
Minette Batters told the environmental audit committee yesterday that farming “is seeing contraction in all sectors” due to a combination of rising prices for feed, fuel and energy and the failure of primary production to get into the bill discount scheme for energy intensive industries.
When asked if prices could begin to stabilise to pre-Ukraine invasion levels, Ms Batters cautioned:
“I don’t think we can give any assurance that things are going to change anytime soon.”
Batters was speaking after yesterday’s inflation report showed food price inflation over 19%, the highest in 45 years.
She added:
“These costs are unprecedented in my lifetime. And actually looking at sort of the general economist views, I don’t think anybody’s seen anything like it since the post World War era.”
Introduction: Investors push large consumer firms over price hikes
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Major goods makers are under pressure to rein in price rises, after UK inflation stuck in double-digit levels last month.
Yesterday’s news that UK consumer prices climbed by 10.1% in the year to March, with food prices rocketing 19%, has focused attention on ‘greedflation’, the process where firms use rising costs and supply chain bottlenecks as an excuse to pump up their profits.
Yesterday, Dr George Dibb, head of the Centre for Economic Justice at the IPPR thinktank, suggested authorities should take a closer look at corporate profits.
“While families struggle to make ends meet, some companies continue to make higher profits from these price hikes, ignoring the impact on consumers.
It’s time for policymakers to look at ‘greedflation’ and prioritise reining in corporate profits, instead of blaming workers’ wages for driving up inflation.
Major consumer goods makers have been hit by rising energy costs and commodity prices, and also lifted wages as workers sought protection from inflation.
Profit margins have been protected by price hikes, though.
Unilever, for example, recently reported underlying sales growth of 9.0% for 2022, driven by price growth of 11.3%. Volumes declined 2.1%, suggesting that many consumers swallowed these price hikes on goods such as Dove, Ben & Jerry’s and Marmite.
But now, wholesale energy prices are much lower than early in the Ukraine war, and supply chain problems are easing after China ended pandemic restrictions. And some investors are now pushing corporates to ease their price increases.
Tineke Frikkee, a fund manager at Unilever and Reckitt investor Waverton Asset Management, told Reuters:
“What have (price hikes) done to volumes and thus to margins? What has that done to their market share as competitors may be pricing lower and gaining share?”
Frikkee added that companies should instead be investing in product innovation, saying:
“Price rises should gradually decelerate as input costs do the same.”
Supermarkets, who must choose whether to pass on these increases to shoppers, or absorb it into their margins, will be pushing goods makers to hold back on price rises.
Andrew Choi, a portfolio manager at San Francisco-based Parnassus Investments, explains:
“Staples companies are getting pressure to ease up on price increases because it hurts foot traffic for retailers, and some retailers have a lot of leverage.”
Tesco blamed “significant operating cost inflation” as it reported a halving in profits last year, with inflation forcing consumers to cut back.
Wednesday’s UK inflation report showed that food and non-alcoholic beverages costs are up 19.1% over the last year, while restaurants & cafes have put their prices up by ‘just’ 10.4%. That suggests supermarkets have found it easier to persuade customers to swallow higher prices.
Wholesale food prices worldwide have been falling since their surge after the invasion of Ukraine, according to the UN, but this is not yet noticable in UK shops.
As the Office for National Statistics told the BBC.
“You would expect to see [global food price falls] reflected in supermarkets but we’re not there yet.”
Helen Dickinson, chief executive of the British Retail Consortium, predicts that food price inflation is likely to slow in the coming months.
The BRC said:
“As food production costs peaked in October 2022, we expect consumer food prices to start coming down over the next few months.”
Consumers will hope they’re right….
The agenda
-
9.30am BST: Realtime UK economic activity and business insights data
-
10am BST: Eurozone trade balance for February
-
12.30pm BST: ECB Monetary Policy Meeting Accounts
-
1.30pm BST: US weekly jobless figures
