In the 20 years since she started her coffee shop chain, Helena Hudson says the business environment has never felt more challenging. Her Real Eating Company has 10 stores in the market towns and cathedral cities of south-east England. .
Even in wealthy areas, “people are still focused on every penny,” she said, leaving glimmers of hope that price rises alone could offset April’s £127,000 increase in tax bill. Mr. Hudson also cannot control wages because the 6.7% minimum wage hike applies to many employees.
So she’s cutting staff. It has closed a London cafe, sacked its long-serving manager and asked part-time workers to work longer hours or quit to ensure they don’t fall below their employer’s National Insurance threshold. “That’s not what we want to do,” Hudson said.
Businesses across the UK are making similarly uncomfortable choices as they calculate how best to respond to the tax and wage rises announced by Rachel Reeves in her October budget.
The policy, which the Prime Minister said will restore “fiscal stability” and help pay for public services, will significantly increase labor costs, particularly in low-wage sectors such as retail and hospitality.
The question the Bank of England must answer is whether the weak job market will ultimately reduce wage growth, or whether stubborn wage pressures will persist and keep inflation above the official 2% target. is.
There is growing evidence that employers have made job cuts following the Budget announcement, with official data showing the number of salaried employees fell in November and December as vacancies continued to fall.
Survey data released on Friday suggested that the proportion of companies that cut jobs in January was higher than at any time since the 2008-09 financial crisis, excluding the pandemic period.
HSBC economist Liz Martins said the combination of a weak economy, rising costs and new opportunities for efficiency related to artificial intelligence felt like a “perfect storm” for the jobs market.
Last week, retailer J Sainsbury’s announced it would cut 3,000 jobs from its head office to its in-store cafes, while executives at Associated British Foods, owner of low-cost fashion chain Primark, said: He said people are starting to buy less clothes. Because I’m worried about job security.
However, despite these job cuts, wage growth accelerated. Last week’s data showed private sector earnings, excluding bonuses, rose at an annualized pace of 6% in the three months to November, which the BoE considers broadly in line with its inflation target. % pace.
One of the factors highlighted in retailer Next’s recent trading report is that increases in the minimum wage will become more permanent for higher wages as employers seek to maintain incentives for promotion to higher grades. This is to bring about a “ripple” effect.
Andrew Wishart, an economist at Berenberg Bank, said the situation was a “major headache” for the BoE’s monetary policy committee, which said it would cut interest rates from 4.75% to 4.5% at its next meeting on February 6. It is expected.
He said the minimum wage was “in serious trouble” because it prevented low-wage employers from absorbing the £25bn NIC increase by suppressing pay.
But even if they cut jobs, other companies will still be able to pass on higher costs to consumers, keeping service price inflation above 4% and pushing headline inflation above 3% later this year. There is a possibility of pushing it up.
The BoE, which is keeping a close eye on services inflation, remains likely to cut interest rates in the short term to prevent “horrendous” consequences for workers, but will have to stop cutting borrowing costs in the second half of this year. Maybe, Wishart said.
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Other economists expect wage growth to slow over the course of the year as companies will no longer compete to hire high-wage professionals who cannot raise their salaries from their current employers.
HSBC’s Martins said that trend was “now a thing of the past”. April’s changes may initially result in some companies raising prices, but they may also include replacing workers with AI, narrowing wages, cutting staff or moving jobs offshore, or anything else companies can respond to. argued that this approach would ultimately reduce inflation.
But wage growth may not subside quickly enough for the Bank of England to feel safe.
Four-fifths of employers plan to pay less this year than in 2024, according to a poll conducted by analysts at Incomes Data Research and released on Monday. Most said that the increase in the NIC would make it less generous than it would have otherwise been.
However, the survey found that more than half of employers who have not yet decided on an award expect it to be more than 3%. More than 40% of employees would have received a salary of 4% or more if a pay agreement had been agreed.
“All business surveys point to the same challenge for MPC: payroll tax hikes, global uncertainty, and the threat of tariffs are pushing inflation and production in opposite directions,” said consulting firm Pantheon. said Elliott Jordan-Doak, UK senior economist at Macroeconomics.
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This means that even though growth is weak enough to justify rate cuts, inflation is strong enough to warrant alarm, he added, adding that tax increases will reduce employment and prices more than rate setters expected. He pointed out that it had an impact on both, with little impact on wages.
If this situation persists, unemployment may need to rise further than previously thought for the Bank of England to rein in inflation.
“The decline in wage growth will take a little longer than the BoE would like,” Martins said. “However, we believe that the remaining pressures are being driven by government policy rather than tight labor markets. I’m thinking about it.”
