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The Brewing Turmoil: UK's Hospitality Sector Amid Soaring Inflation

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Michael Chen

May 7, 2024 - 04:22 am

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UK Inflation Struggles: Hospitality Sector Bears the Brunt of Government Policies

(BNN Bloomberg) – Rishi Sunak, the Prime Minister of the United Kingdom, has often claimed responsibility for the reduction of UK inflation to 3.2%. Yet, it appears that some policies introduced under his governance are contributing to the challenges faced by the Bank of England in bringing inflation down to the government's goal of 2% and maintaining it.

The hospitality industry, encompassing bars, restaurants, hotels, and theaters as well as food and beverage services, now represents roughly 2.5 percentage points of the annual inflation rate. This equates to about 80% of the total and is more than twice the industry's share from just two years ago, data from the Office for National Statistics indicates.

These particular sectors are feeling the heat from a series of government measures, such as the increments in the minimum wage, increased alcohol taxes, and a significant 50% rise in the pay required for employees who are granted work visas. The scarcity of work visas has caused a strain on the influx of labor, thereby adding upward pressure on wages.

Bank of England (BOE) officials have been showing signs of trepidation about reducing the interest rates from the 16-year peak, accentuating concerns that a tight job market is catalyzing wage inflation and services inflation. This points to the fact that the battle against inflation may have severe consequences for hospitality businesses, driving many to the verge of insolvency. Such a situation starkly contradicts the "feel-good" sentiment the Conservative party hopes to spur in the lead-up to the general elections projected for later this year.

Adam Quayle, Box of Tricks' co-artistic director, a Manchester-based touring theatre company, shared the difficulties facing the sector. "Times are tough at the moment," he expressed. "The aftermath of the pandemic, along with Brexit and the cost-of-living crisis, have made navigating the industry particularly challenging."

BOE officials continue to assess when to reduce interest rates, keeping a keen eye on the rate at which price increases are put into effect by service providers, particularly those in hospitality. Governor Andrew Bailey and his team expect to retain the key interest rate at a 16-year high on May 9, but have signaled potential rate cuts once inflation is firmly under control.

However, for hospitality companies, it's a daunting task to lower their prices. Businesses such as bars, restaurants, and entertainment venues must cope with the increased costs of food and, notably, wages. Many workers have exited the job market since the pandemic, resulting in a workforce shortfall that necessitates higher salaries.

A part of this burden is directly tied to decisions made by Sunak's government, including those concerning excise duties. Jeremy Hunt, the Chancellor of the Exchequer, raised duty rates on all UK alcoholic products to align with the Retail Price Index towards the end of the summer period.

This policy led to marked price increases in spirits, wine, and beer, culminating in a record contribution of alcohol and tobacco to the annual rate of CPIH inflation in August. The Chancellor subsequently froze these duties in the Spring budget, recognizing the impediment they posed to the BOE's anti-inflation efforts.

Wages remain the predominant factor driving prices upwards, rising swiftly due to an increase in the minimum wage and a reduction in the availability of workers.

The hospitality sector experiences wage growth of approximately 8%, surpassing the national average, according to PAYE data scrutinized by Capital Economics. With Britain's departure from the European Union, the pool of talent has diminished, leaving firms to vie for a limited workforce.

Furthermore, Britain's inactivity rate, indicative of individuals not engaged in work and not seeking employment, has also edged up for several reasons. A shift towards further education among young people and early retirement among older individuals, as well as a post-Covid workforce seeking remote work opportunities, have rendered the hospitality industry less appealing.

"The sustained strength of wage growth in these sectors is slightly alarming. It may lead to a scenario where wage growth and, consequently, CPI services inflation recede at a gradual pace," commented Paul Dales, chief UK economist at Capital Economics.

The situation threatens to worsen following a 9.8% increase in the National Minimum Wage to £11.44 an hour, implemented in April. This surge has not yet been reflected in the official wage statistics but is expected to disproportionately impact the costs incurred by leisure and hospitality businesses, given their large contingent of low-wage staff.

Prime Minister Sunak and Chancellor Hunt have affirmed their commitment to counteract inflation. They have largely designated the task of price moderation to the BOE, which has responded by hiking interest rates.

"Our main focus over the past year has been combatting inflation through elevated interest rates," Hunt stated earlier in the month.

Nevertheless, consumers continue to grapple with the cost-of-living crunch and remain susceptible to price hikes, which restricts the ability of bars and restaurants to augment their charges. Even if the Bank of England embarks on reducing interest rates, the borrowing costs will likely stay above the norms of the previous decade.

"Business margins are already remarkably slim. If these costs are transferred to customers, there's risk of deterring them due to the perception of excessive expense," explained Julie Palmer, a partner at bankruptcy firm Begbies Traynor. She posited the dilemma faced by businesses: "But what other choices exist to mitigate the elevated cost base if not by relaying it to consumers?"

As evident from the narrative by Bloomberg L.P., it is clear that the UK's hospitality sector is under strain from governmental policies. This struggle is compounded by persistent wage pressures and a tightening workforce, which potentially delays the achievement of targeted inflation rates and confronts the hospitality industry with a dire choice: increase prices or absorb soaring costs. With the General Election on the horizon, careful attention will surely be paid to how BOE policy decisions and government actions affect businesses and consumers alike.

ONS Data Impact

As a closing note, it is crucial to understand the delicately balanced ecosystem of the UK economy, where government policies interplay with economic indicators and consumer behaviors. Hospitality, as a sector that feeds into the overall lifestyle and well-being of citizens, not only faces economic hardships from regulatory impacts but also reflects the changing social dynamics of labor and consumption. The coming months will be a testament to how the country navigates these complexities in the hope of fostering a resilient and flourishing economic landscape.

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