The Bank of England warned earlier this month that employers were increasingly responding to the Chancellor’s £25bn increase in employer National Insurance contributions (NICs) by raising prices, signalling that interest rates may remain higher for longer to prevent the economy from overheating.
If businesses could raise prices then they would raise prices. So, the point is not that businesses are raising prices because…..it’s why are businesses able to raise prices?
Because there’s still a lot of extra money floating around the economy. The solution is therefore to do more QT.
Yes, but the way to find out whether you can raise prices is to try it and see. See what your competitors do. See what the effect is on volume of sales. You won’t see the business you missed, of course. And you might find not raising prices eats into margins and limits your options.
The theory here is over-simplistic, not real world.
It takes time to remove costs, aka employees, from a business so of course they’re going to try to raise prices first, or at least say they are whether thats their intention or not.
It’s going to take a while before the long term effects of the budget can be assessed to any reasonable level of accuracy and the key indicators will be numbers in employment and bankruptcies.
A business in isolation, with a cost increase, might try and eat it to maintain competitive pricing.
If all have a roughly similar price increase, they all might as well pass it on…
The largest, controllable expense is the payroll cost, and this is the cost increased NIC directly concerns. It is likely businesses will start to reduce that first: reduce head-counts by no more hiring, not replacing workers who have left, redundancies; reduce overtime; reduce benefits; wage freeze.
Firms supplying goods and services to the government will raise prices, and gov will be very understanding about it.
The firm will post higher prices to the private sector too. Others in similar lines of work will see higher prices and follow the example.
Pretty soon you have a cascade of higher prices across the board.
“If businesses could raise prices then they would raise prices. So, the point is not that businesses are raising prices because…..it’s why are businesses able to raise prices?”
If a market is competitive, then the price level will be one that just about keeps all the players in business, with some marginal ones teetering on the edge. If they all get a rise in their costs across the board (such as NI), then they will all have to put prices up, because if they don’t they will all be in queer street, because they don’t have the profit margin to absorb those new costs. The market will then continue its competitive nature but at a higher plane of prices than before.
Hmm. The usual analysis has a few of those teetering going bust, which is what reduces supply and therefore raises prices.
Perhaps both will happen? Or margins become so thin that investors withdraw to other markets, making that one less competitive and enablng prices to rise?
OTOH it strikes me that this NIC rise is rather like devaluing the currency. Everyone is affected: those trading with furreners pay more £ for their imports; those trading with those trading with the furreners have to pay the resulting higher prices.
It’s a kind of playing-field leveller except for the public sector, of course, who will all be let off (because tax on the public sector doesn’t actually exist. It’s simply a pay reduction from the advertised number. The pay actually comes involuntarily from the private sector.)
Shock horror, entities deal with increasing costs by seeking to increasing income.
“The usual analysis has a few of those teetering going bust, which is what reduces supply and therefore raises prices.”
If the market is fragmented and truly competitive then yes. But we don’t have that, we have oligopolies of large corporate behemoths, they are far less likely to have the bank pull the plug on them overnight than a small business. And given there’s only a few players in each market, they can in effect collude without having to collude – there’s just a general acceptance that prices are going up, so they do. No-one goes bust, and it all continues nicely for everyone at the higher price level.
@ Jim
It’s going to be great when all the decent small restaurants are gone and we have a choice of McDonalds or Nandos.
My go to “decent small restaurant” has just told me they’re selling up and going back to Madeira. 🙁