Inflation Hits Businesses and Their Consumers
Challenging UK macroeconomic forecasts with rocketing inflation, stagnant wages and declining GDP - consumer confidence is now approaching a three-decade low, though many are yet to come to terms with the full extent of its impact. Meanwhile, businesses are taking a pragmatic approach to the rocky road ahead and preparing for the worst. Our latest surveys take the temperature of UK consumers and businesses across Europe on the edge of recession, looking at attitudes to spending and financial management for the testing times to come.
The Reality of Inflation
Inflation levels in excess of 13%, stagnant wage growth, and GDP set to continue their decline well into 2024 are combining to present a gloomy outlook for UK consumers. Energy tariff forecasts are predicted to reach £4,266 in the first quarter of 2023, an increase of more than 50% on May 2022 estimates. Meanwhile, at the checkout, food prices look set to increase by between 10 and 15 % year-on-year, up from 9% in May 2022. And fuel costs, despite now appearing stable, are up 15% since April 2022 and a huge 30% since the start of the war in Ukraine.
Given the magnitude of cuts required, consumers will need to reduce their expenditure across both discretionary as well as essential spend.
Using behaviours in the global financial crisis as a guide, consumers will make significant cuts to both discretionary (4-5% reduction vs. March 2021) and essential (3-4% reduction) spend.
The post-Covid pent-up demand that fuelled robust consumer spending in the first six months of 2022 is now a spent force. Household budgets are under severe threat, but not all consumers are ready to accept the new reality. Over 50% of those responding to our survey expect little or no drop in their standard of living at all. The more realistic respondents are making plans to adjust their spending behaviours with a variety of tactics, from downtrading, to deferring purchases and making fewer shopping trips.
of consumers do not expect to make any adjustments to their discretionary spending.
of under 25's said they expect an increase or little or no change to their discretionary spending.
on average, only expect to make minor changes.
The commercial reality of more than thirty years of low or no inflation leaves most contemporary businesses lacking the fundamental experience and skills to deal with the new economic paradigm. The cost of essential inputs are rising fast, with some food crops experiencing inflation of over 100%, and manufacturing commodities such as copper and aluminium seeing price rises of 60%. Our latest survey shows no sector immune and more than 90% of companies we spoke to have already implemented one or more price increase. Despite this, most look set to experience an average 25% drop in EBITDA.
Material costs are the most impacted, with personnel costs following at 7.9%.
of companies surveyed have increased prices - 50% at least twice and 80% planning more increases in the next 12 months.
expected inflation impact on average cost structures over the next two years.
Our survey results show consumers at a tipping point as optimism remains strong but inflation realities begin to hit home. How they plan to cut spending in the future varies by demographic and category - what will remain consistent is our commitment to monitoring the situation and advising our clients as the crisis takes hold.
Dominic Miles, L.E.K. Partner and Global Co-Head of L.E.K.’s Consumer Sector
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As inflation settles in for the long-term, our survey shows that no industry is immune to its effects, but some businesses are set to fare better than others. Our focus is on helping all of our clients develop the resilience they need to ride out the storm and endure for the long-term.
Jean-Philippe Grosmaitre, L.E.K. Partner
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L.E.K. Inflation Webinar
The L.E.K. Consumer Inflation Report 2022
Access the report to discover in detail how UK consumers are rethinking their spending in a time of rising inflation.
The L.E.K. Business Inflation Report 2022
Access the report to discover how European businesses are adapting to inflationary pressure.