Businesses worried about cost pressures as outlook for British consumer starts to look gloomy

 
Jasper Jolly
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BRITAIN-GASTRONOMY
Restaurants were among the sectors reporting lower revenues (Source: Getty)

Cost pressures in Britain’s consumer services sector rose at the fastest rate since the financial crisis in the three months to May, as weaker than expected growth figures underlined the challenges facing British businesses.

A balance of 60 per cent of consumer services firms reported total costs per worker employed rose in the past quarter, the most since 2008, according to a survey by the Confederation of British Industry (CBI).

The weakness of sterling against other major currencies since the EU referendum has led to a big jump in input prices for businesses, although the pace of input cost increases has moderated in recent months, according to government data.

Consumer services industries report costs per employee rising at the fastest since 2008

Nevertheless, businesses have been forced to choose between absorbing the increased costs in their margins or passing them on to customers.

In consumer-facing sectors businesses have seen reduced volumes, the CBI survey said, with hotels, bars, restaurants, and travel and leisure companies all reporting declining sales volumes in the quarter to May.

Read more: British businesses intend to invest more despite consumer spending slowdown

Executives across the services sector as a whole remain optimistic about the business situation, but consumer services firms expect sales volumes to fall at the fastest pace since 2012.

Rain Newton-Smith, CBI chief economist, said: “Rising inflation is squeezing household incomes, which is hitting demand in the consumer services sector. At the same time, cost pressures are building across the board, painting a difficult picture for services firms.”

The prospects for the sector remain challenging, with surveys showing Britons are increasingly wary as prices rise faster than wages.

Inflation rose to 2.7 per cent in the year to April, with wage growth lagging well behind. That drove a fall in Britons’ expectations for their household finances, according to a poll by Yougov and the Centre for Economics and Business Research (CEBR).

Read more: Sterling falls as inflation accelerates to near four year high

Consumer confidence slipped to its weakest since the aftermath of the Brexit vote last June, according to the survey.

While the measure showed British consumers are overall more confident than pessimistic, confidence remains below pre-referendum levels.

Nina Skero, CEBR head of macroeconomics, said: “The most concerning aspect in the numbers is the continuing decline in people’s household financial situations. Both forward and backward-looking measures are at their lowest level for a number of years and it doesn’t take much for a tightening of purse strings to lead to a slowdown in the economy.”

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