Festive boost for retailers adds to Bank of England’s inflation woes

Given the strength in trading, it’s no wonder some firms think they can make price rises stick

Last modified on Wed 12 Jan 2022 17.48 EST

Retailers’ trading reports will roll in for a while yet, so there’s still time for losers to reveal themselves, but it was hard on Wednesday to find anybody who was unhappy with their Christmas lot or who is panicking about the year ahead.

Sainsbury’s produced a £60m upgrade to its profits forecast alongside the usual excited blah about the “lowest ever” Christmas dinner and the “biggest ever” new year. Omicron clearly diverted a few quid from pubs and restaurants into supermarkets’ tills but the numbers were still strong on their own account. Meanwhile, JD Sports went for a £65m upgrade after enjoying a boom and Dunelm, the soft furnishings group, said profits would be “materially ahead” of market expectations.

Over at Whitbread (not a retailer but Christmas also matters for the owner of Premier Inn, Beefeater and Brewers Fayre) Omicron killed any chance of a profits surprise but the group said it traded “significantly ahead of the market” in the UK.

What’s going on? Aren’t all these companies meant to be fretting about the cost-of-living squeeze on consumers, unresolved supply chain hassles and the arrival of inflation in their energy and wage bills?

There was a bit of that, but the general tone was that companies expect to cope. Whitbread predicts inflation in its sector to average 7%-8%, adding £1.4bn to its cost base, but thinks it will be able to “largely offset” the pressures via cost savings, increases in room rates and the benefit of being a large business. The tale was similar at Dunelm: a mix of price rises and better sourcing will “largely mitigate the impact of inflation on commodity costs and freight rates”.

The outlook wasn’t spelled out as clearly at Sainsbury’s, which is simultaneously trying to parade its Aldi price-matching credentials on 150 core products while also passing on cost pressures (such as 5.3% pay increase to base pay) where it can. It can count on its regular 2% annual saving from efficiency gains but can also, say analysts, expect the pricing climate to become easier in supermarket-land.

That, at least, seems to be what Jefferies’ analysts mean by “a more rational industry structure in the face of building input inflation”. Discounters will have a “reducing appetite” for ploughing profits into lower prices and the private equity-owned players (Asda and Morrisons) “seem to be displaying a growing focus on profit preservation”. In ordinary English, profits margins won’t get whacked because prices will go up.

From the point of view of shareholders, it all sounds reassuring, even if much hinges on whether consumers achieve wage increases to protect their disposable incomes. But, given the current strength in trading, one cannot be surprised that retailers think they stand a fair chance of making price rises stick. For the Bank of England, though, it’s another setback to 2021’s idea that the return of inflation would be “transitory”. In the retail and hotel sectors, that’s not how life looks at the start of 2022.

According to the revised central banking script, inflation should peak at 6%-ish in the spring and then fall. Well, maybe. One can also see how pressures could linger, or take far longer to reverse. Boardrooms aren’t hiding the fact: they are consciously adjusting for an inflationary environment.

Higher gas prices could extend beyond 2024

On a similar theme, Chris O’Shea, the chief executive of Centrica, the British Gas owner, is only making a safe prediction when he says gas prices could stay high for two years. For consumers, at least 12 months is virtually guaranteed already because of the backward-looking nature of the regulator Ofgem’s price-cap formula.

The increase in the price cap in April, which seems likely to be set at about £2,000 versus £1,277 currently, captures wholesale prices that have rocketed since autumn. The following adjustment, to apply from October, will look at wholesale prices in the first half of this year, which futures markets say will remain high. Indeed, the current best guess is that £2,000 will be exceeded.

Of course, the government and Ofgem can – and should – try to dampen the shock for consumers by various means, such as removing VAT, shunting green levies on to general taxation and deferring the costs of the many supplier failures. But ministers will presumably want to reimpose all those billing items as soon as wholesale prices fall. So, yes, two years is a reasonable horizon. But it could stretch a lot further.

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