Manufacturing and healthcare businesses particularly squeezed by inflation

As households start to feel the impacts of consumer price increases on their financial resilience, inflation is also squeezing businesses’ profit margins. The ONS’s most recent “Business insights and impact on the UK economy” contains some interesting data on how companies are dealing with increasing input costs.

Across all sectors, the most common response, reported by 36% of businesses, is to absorb costs, followed by passing price increases to customers (29%). Remarkably, 28% of firms overall said that their business “has not been affected by price rises”. Companies that said this were particularly prevalent in the information and communications, and professional, scientific and technical services sectors. It is possible that the question has been interpreted quite narrowly — so not including staff pay increases. It will be interesting to see how this picture changes over the coming weeks.

There are also some noticeable differences between sectors. The chart shows the percentage of businesses in each sector that said they had had to absorb costs (left column), pass prices increases to customers (middle column), and reduce staff working hours (right-hand column). The industries have been ordered based on the difference between the first two columns — so, those sectors appearing at the top were, on balance, the most likely to have absorbed costs but not passed them onto customers.

The business sectors that seem to have been hardest hit by increasing input costs are varied: arts and recreation, health and social care, and manufacturing. This probably reflects fairly different dynamics for each — not least the ability of their customers to absorb further price increases. And, for example, manufacturing businesses have likely been particularly vulnerable to both energy and commodity price increases and supply chain challenges.

Interestingly, aside from manufacturing, it is the large consumer facing sectors — retail, hospitality and personal services — that report the highest likelihood of passing costs onto customers. This may be a function of many factors, such as exposure to commodity prices, cost increases emanting from supply chain disruption, the need to recover margins after a tough period throughout COVID-19 and, in some cases, potentially remaining rebound demand for services that were unavailable during the pandemic.

Overall, assuming these patterns are broadly representative of the UK’s business base, it looks like it will take some time before increases might stabilise again at the more modest levels businesses and customers have gotten accustomed to over the last two decades.