Hospitality firms are bracing for the return of inflation

October’s inflation figure has worried hospitality firms. While it is not too far above target – 2.3 per cent versus the sweet spot of two per cent – and one month does not constitute a trend, it has exacerbated concerns companies already had about the future of their industry.

There are two reasons hospitality is worried about inflation. The first is that inflation dents consumers’ confidence as well as their wallets. The second is that firms are likely to add to that figure next year if they have to pass on tax rises to customers. If prices are already going up, customers will be less able to stomach increases next year.

There are a whole host of reasons that firms’ cost inputs may rise: geopolitical tensions contributing to higher energy costs and a more difficult shipping environment, potential tariffs on goods from Trump’s America, and higher taxes announced in the Autumn Budget.

“[When firms are] trying to get inflation under control and hoping that it was easing, they’re going to be hit by not only their own labour costs, but possibly inflationary pressures as a result of their own supply chain,” Sophie Michael, head of retail and wholesale at BDO, said. 

UK Hospitality has predicted a £3.4bn cost increase, in part due to the rise in national employers contributions announced in the Autumn budget, which will “impact jobs and push up prices”, chief of UK Hospitality Kate Nicholls said.

“The reality is that businesses are unable to absorb any more cost, having taken on so much over the past four years, and it is consumers and team members that will feel the effects,” Nicholls said.

While most businesses have said they will try their best to minimise the effect of tax rises on customers, some have already started to warn on price inflation.

The chief executive of pub chain Young’s, Simon Dodd, has predicted a three per cent rise in prices. “We will look to be more efficient and challenge the payroll line but will it be enough to cover all of the cost… at the moment I just don’t know,” he wrote on Linkedin.

“[Higher costs are] quite a blow really to retail at a time when margins are very thin, consumer confidence is low, spending’s not there,” BDO’s Michael said.

Consumer confidence and discretionary spending

Consumer spending is closely linked to consumer confidence – the happier people feel about the stability of their income, the more likely they are to maintain or increase spending.

But despite a rally this year after the election, consumer confidence fell immediately after the Budget in November, with ongoing pressure on household finances squeezing spending, increasing debt and lowering savings.

“Consumers delaying spending is the last thing businesses want to hear, particularly for those firms that are already teetering on the edge,” Mark Ford, partner in the Restructuring & Recovery team at professional services firm Evelyn Partners said.

In October – just before the Budget – EY predicted consumer spending would rise to 1.9 per cent in 2025 – a downgrade on the 2.5 per cent predicted in July.

“Lower household savings have reduced the scope of potential consumer spending and sticky inflation means that interest rate cuts are set to occur at a gradual pace. This means that growth in 2025 won’t be as robust as it could have been,” Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said.

Hospitality bosses have called for a phasing of changes to National Insurance, as well as revisiting the timelines of other costs such as the new packaging levy, to help them avoid passing costs on to customers.

“This is the biggest threat to hospitality I’ve seen in my lifetime,” chief executive of Fuller’s, Simon Enemy, told City AM last week. 

“Fuller’s will be OK… we’ve been around for 130 years, and our balance sheet is strong,” he added. “But lots of companies won’t be”.