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(Bloomberg) — Prime Minister Rishi Sunak’s own policies are pushing up the cost of eating out and drinking in pubs, maintaining upward pressure on UK inflation that the Bank of England is trying to halt.
The Conservative government has lifted taxes on alcohol and pushed up the minimum wage while attempting to choke back immigration, forcing pubs and restaurants to put up their prices to pay for higher wages and expenses.
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That’s left the hospitality industry one of the main sources of rising prices in the services sector. While the headline rate of inflation fell back to the 2% target last month for the first time in almost three years, sticky prices in the services sector remain a concern for the central bank as it weighs whether it can cut interest rates.
Sunak claimed victory in the UK’s effort to rein in the cost-of-living squeeze triggered by double-digit price growth following the war in Ukraine and the end of pandemic restrictions. But consumers are still noticing higher prices when they go out to pubs and restaurants, reducing the chances that the ruling Conservative Party can capitalize on more favorable overall trends on inflation ahead of the July 4 election.
“Inflation’s trajectory may get bumpier after the election with the higher National Living Wage and low labor supply likely to increase the upward pressure on prices, even though another fall in energy bills is coming in July,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
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Pubs, restaurants, hotels and theaters accounted for about 1.4 percentage points, or about 70% of the annual rate of inflation in May, more than double the share of just two years ago, according to official data published Wednesday. These are also the businesses that were pushed to the brink of insolvency after plunging demand during the pandemic was followed by spiking borrowing costs.
While goods prices fell the most since 2016, the Office for National Statistics said restaurants and hotels are still increasing prices to pass on higher costs for food and wages.
That’s a direct effect of the government’s 9.8% rise in the Minimum Wage that came into force in April. The increase is disproportionately felt by hospitality businesses which employ more lower paid staff.
It’s adding to existing pay pressures as businesses compete for a smaller pool of workers after around 800,000 dropped out of the jobs market during Covid. A 50% increase in the salary required to receive a work visa meant fewer workers from abroad could fill in the gap, further pushing up wages for hospitality businesses.
The government also hit pubs and restaurants when Chancellor of the Exchequer Jeremy Hunt hiked UK alcohol duty rates in line with the Retail Price Index at the end of last summer.
That sent prices for spirits, wine and beer soaring, with alcohol and tobacco posting their largest contribution on record to the annual rate of CPIH inflation in August. Hunt eventually froze the duty in the Spring budget conceding it was complicating the fight against inflation.
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