Soaring price rises for businesses mean they'll need to pass the costs on to customers, reports Economics Editor Joel Hills
The price of a night out looks set to rise sharply as businesses in the hospitality sector plan to pass on their spiralling costs to their customers.
A total of 93% of the 680 businesses surveyed by UK Hospitality said they intend to increase their prices by an average of 11% in the next few months, well above the headline rate of inflation which stood at 5.4% in December.
Pubs, bars, restaurants and hotels have seen their overheads surge since lockdown restrictions began to lift last April.
Shortages of both labour and goods mean the cost of staff, food and drink, energy bills and insurance have risen dramatically.
The emergence of the Omicron variant just before Christmas sabotaged hopes that fortunes could be revived.
“The problem is we’ve had a challenging two years where hospitality has hit the hardest and longest and borne the brunt of the economic restrictions due to Covid. Put simply: there’s no cash in the bank,” says Kate Nicholls, chief executive of UK Hospitality.
“It’s a question of passing these costs on or facing business going bust.”
In April, firms will be hit by what Nicholls describes as the “five horrors”:
Employers National Insurance contributions are set to rise by 1.25%
The National Living Wage increases by 6.6% to £9.50 per hour
Covid support from government is further withdrawn (VAT returns to 20% and business rates relief is reduced)
The headline rate of inflation is expected to peak at around 7%
The moratorium on legal action by creditors ends.
UK Hospitality is putting pressure on the Chancellor to delay his planned tax increase and give companies “room to breathe”.
It calculates that if prices were to rise by 11% across the sector it would add 1.7ppt (percentage points) to the headline rate of inflation over the next twelve months.
The problem companies face is that many of their customers are also struggling to absorb price rises.
“I’d be very surprised if the increase in prices is anything like as large as UK Hospitality suggest,” says economist Sam Tombs
He points out that the data suggests that catering prices (1.3%) and accommodation prices (0.2%) only rose slightly when temporary rate of VAT increased from 5% to 12.5% in October.
Tombs adds: “More generally, pricing power in the restaurant sector is very weak due to lots of competition. I’ve assumed that prices rise in this sector by only 1.5% in April.”
Nicholls is clear one in three of her members have no cash reserves and that a VAT increase will be passed on in full.
“If prices go up then they will lose custom,” she concedes. “But there’s greater risk that business won’t survive if they don’t.”