British Businesses Brace for Price Hikes and Job Cuts

LONDON (Reuters) – British businesses expect to raise prices and reduce staff numbers in response to an increase in employers’ social security contributions that will take effect in April, a Bank of England survey of more than 2,000 firms showed on Thursday.

The BoE’s Decision Maker Panel revealed that:
– 61% of companies expected reduced profits.
– 54% planned to raise prices.
– 53% expected lower employment.
– 39% intended smaller pay rises due to the rise in National Insurance set out in Oct. 30’s budget.

Other surveys have highlighted a decline in business sentiment, hiring, and investment intentions since Finance Minister Rachel Reeves announced a £25 billion ($31 billion) increase in payroll taxes.

The economic slowdown has raised concerns in financial markets about Britain’s public debt levels, sharply increasing borrowing costs this week.

Separate figures on Thursday from an association of recruitment agencies indicated that demand for new staff had fallen by the most since August 2020.

The BoE, which is considering when to reduce interest rates again, is closely monitoring whether the increased employment costs translate into inflation through price hikes or result in job cuts, reduced investments, and wage growth, potentially slowing the economy.

Rob Wood, chief UK economist at Pantheon Macroeconomics, noted that the BoE’s survey suggests the tax increases are contributing more to rising prices than to economic slowdown, as reported by the REC or S&P purchasing managers’ index surveys.

“The core DMP (survey) questions continue to signal stubborn inflation and wage growth, with a less severe weakening in the jobs market compared to qualitative surveys, which should lead the Monetary Policy Committee to cut interest rates only ‘gradually’,” he said.

British consumer price inflation rose to an eight-month high of 2.6% in November. The BoE expects inflation to rise further in 2025 and not return to its 2% target until 2027, limiting its willingness to cut interest rates from their current 4.75%.

The BoE survey, conducted between Dec. 6 and Dec. 20, showed firms planned to raise prices by 3.8% over the next 12 months, 0.1 percentage points more than expected in the three months leading to November. Expected year-ahead wage growth remained unchanged at 4.0% on a three-month moving-average basis in December.

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