The Bank of England has forecast that inflation will climb as high as 3% by the end of the year. Retail Week looks at what that means for customers and for retailers

  • Rising interest rates could affect wages and customer spending
  • Inflation in the US soared to 5.4%, a 13-year high
  • International oil prices are high and disruption of global supply chains are contributing.
  • The shipping crisis has hit UK home and DIY retailers

In a final warning as he stood down as chief economist of the Bank of England at the end of June, Andy Haldane warned that rising inflation could lead to a “nasty surprise” in the form of a sharp interest rate hike. 

Inflation hit 2.5% in June, the highest figure since August 2018 and ahead of expectations according to the Office of National Statistics. In the same month, inflation in the US soared to 5.4%, a 13-year high.

The ONS said rising prices of food, second hand vehicles, clothing, footwear and fuel were the main factors behind the jump. Data showed that women’s clothes prices rose 4.3%, books rose 8% and bicycles rose 13%, as prices of some categories depressed by lockdown bounced back.

While much of the inflation is being driven by consumers buying more apparel and footwear and eating out more, there are also wider macroeconomic factors at play. 

The BRC-Nielsen shop price index for June showed that food and non-food prices fell, but British Retail Consortium chief executive Helen Dickinson warned it wouldn’t last. 

“Retailers’ costs are continuing to mount due to global food price increases, Brexit red-tape, Covid-related supply chain disruption, raw commodity shortages and increased shipping and petrol costs,” she said. ”The increasing cost burden on retailers may be passed onto the consumer, threatening price rises as the pressure mounts in the months ahead, especially with additional Brexit checks this autumn.”

International shipping crisis

shipping container

International oil prices are high and disruption of global supply chains across both road and seafreight are contributing too. 

As reported by Retail Week earlier this week, the cost of importing a single shipping container from southeast Asia has increased as much as 10 times since the pandemic began in March 2020.

The Entertainer boss Gary Grant described the situation as an “international crisis” and said the availability of products at Christmas would be affected, driving up prices in turn. 

Pureplay fashion giant Asos also observed that “increased global supply chain pressures” were among the pressures it has been facing, driven by “freight capacity shortages and delivery delays coming out of key areas of supply” - a situation likely to continue for some time.

However chief executive Nick Beighton said higher costs had not, and would not, be passed on to customers. He said: “We have not changed any of our pricing - quite the contrary. We’ve invested heavily in it and will continue to do so.”

The shipping crisis has also hit UK home and DIY retailers. Pureplay electricals retailer Buy it Direct chief executive Nick Glynne went so far as to call on the Competition and Markets Authority to investigate what he described as an international shipping “cartel”. He maintained that a “self-perpetuating cycle has gotten out of control”.

“It’s inevitable that there will be some cost pressures that will have to be passed through to consumers”

Retail Economics chief executive Richard Lim says that inflation will likely continue to increase until at least the end of the year and will bring rising prices for consumers in its wake - bringing increases in product prices and decreased customer spending power. 

“It’s inevitable that there will be some cost pressures that will have to be passed through to consumers,” says Lim. 

“As these costs are moved onto consumers, then you’ll kind of see a general wave of higher levels of cost of living, which in turn will affect individual spending power.”

According to the Department for International Trade, the UK imported $631.9bn (£461.3bn) worth of products from around the world in 2020. Of that total, 53.7% of products came from mainland Europe, 26.1% from Asian trade partners and 12.1% from North America. 

“We import a lot of stuff from China, but that’s heavily weighted towards electricals and clothing and footwear,” Lim says, adding. “The majority of imports still come from Europe, and the majority of the imports from Europe come over on lorries. 

“We shouldn’t blow things out of proportion too much. Some pockets of retail will be affected worse than others by the squeeze on international shipping and freight costs and international supply chain issues. It’s not something that’s going to be kind of right across the board for the whole of the sector.”

HGV driver shortage

Wheels of HGV lorry

However a national shortage of HGV drivers in the UK this year has been well-documented. The Road Haulage Association (RHA) estimates there are 100,000 fewer drivers in the UK this year compared to last because of a combination of Brexit red-tape and coronavirus. 

That has led to availability issues at supermarkets. RHA managing director Rod McKenzie saying the “UK has plenty of food, but not enough drivers to deliver it”. 

Sainsbury’s boss Simon Roberts says that across some categories the grocer saw some deflation in the first half of the year. However, noting the issues with supply chain, he said there had been inflation across some commodities, including core categories such as fresh and ambient groceries.

“We’re working as hard as we can to mitigate those costs as far as we can through our cost saving programme,” he said. 

Despite the best efforts of grocers to keep prices down, data from Edge by Ascential shows that inflation is beginning to push up the average price of a basket of everyday products. 

While inflation is at a three-year high, Haldane’s warned that it could pass 3% by year’s end and even continue into 2022. 

“Nor do I think it’s nailed-on that three-and-a-bit will be the high-water mark,” said the former BoE chief economist. ”There’s a rising risk that won’t be the peak and we could see greater persistence and a higher level of that peak. Next year could see price pressures building, not abating.”

If inflationary pressures around the UK and the world continue to grow for the rest of this year and into the next, the BoE may be forced to increase interest rates to keep inflation under control. 

For retailers, much of the rest of this year will be spent working closely with suppliers to keep availability high, while trying to avoid passing too much cost back on to consumers, who themselves may start to feel the pinch.