UK companies could damage the fragile economic recovery by using next month's rise in VAT to "mask" hikes in prices as they seek to protect profits from rising costs, a leading firm of accountants warned yesterday.
Following widespread price-cutting during the downturn, 56 per cent of retailers and consumer goods manufacturers plan to raise prices next year above the 2.5 per cent uplift in VAT on 4 January, a KPMG survey of 200 senior executives reveals. Across all industries, 40 per cent of companies, including those in the financial services, utilities (excluding water) and technology sectors, plan to hike prices by an unspecified amount.
Martin Scott, a partner at KPMG, said: "In today's price-sensitive market, any increases may well have a damaging effect on sales volumes."
A key problem is that despite the end of the recession, the level of prices that consumers find acceptable seems to be lower than retailers had hoped.
Mr Scott said: "Downturn discounting has reset the price baseline for consumers, who are now unwilling to pay more for goods and services: companies need to be wary of first mover disadvantage."
While all businesses have been hit by rising fuel costs, companies – notably non-food retailers – that source from the Far East have also faced record freight shipping rates, soaring cotton prices and rising wages in China's factories.
Fashion retailers ranging from Next to New Look have warned clothing prices could rise by as much as 10 per cent next year.
KPMG said that large-scale price hikes could hit consumer confidence and the wider economic recovery by causing an unexpected inflation spike on the high street at a time when trading conditions are fragile.
Mr Scott added: "Any short-term boost to profitability may be offset if longer-term demand in the economy is dampened by pushing up inflation – and with economic forecasts predicting a slowdown in the new year, this could threaten an already precarious recovery."
However, the British Retail Consortium (BRC) and Nielsen survey provided hope on prices last week when it said the annual rate of shop-price inflation fell to 2 per cent last month, down from 2.2 per cent in October.
According to KPMG, UK companies lack a clear understanding of, and struggle to obtain accurate data on, the actual effect of price on their financial performance. Almost two-thirds (63 per cent) of businesses admitted that recession discounts were introduced "without fully understanding" the impact on demand.
The annual consumer price index inflation rose 3.2 per cent in October – the Bank of England has warned that inflation is likely to hit 3.5 per cent over the first half of 2011, as a number of pressures kick in.
Surge of festive shoppers
* Retailers are breathing a huge sigh of relief, with early data suggesting shoppers came out in force to do their Christmas shopping on Saturday and Sunday ahead of another cold snap at the end of this week.
* Some of the UK's biggest shopping centres, including Sheffield's Meadowhall, The Trafford Centre, near Manchester, and Kent's Bluewater, enjoyed a bumper weekend, with footfall up strongly on the previous week.
* Gordon McKinnon, director of operations at The Trafford Centre, said that footfall on Saturday and Sunday was up 10 per cent on the same weekend last year. He said: "Today [Monday] again has been exceptionally busy – it does look as if Christmas is coming late and people, who have not been able to get to the shops because of the snow and ice, are now deciding they have to do their Christmas shopping."
* Experian Footfall said the number of shoppers in non-food stores rose by 5.6 per cent and 3.8 per cent on Saturday and Sunday, respectively, compared with the previous week.
* Meadowhall said that footfall surged by 20 per cent on Saturday on last year's figure. Darren Pearce, Meadowhall'scentre director, said: "We are still waiting for final sales figures, but feedback from the retailers suggests that this has been the strongest weekend in terms of trade so far this year."
* Bluewater said that 250,000 people had visited the centre at the weekend, up on 220,000 in 2009. Andrew Parkinson, the general manager at Bluewater, said: "We are expecting next weekend to be even busier as the final weekend before Christmas."
* However, Experian Footfall said that the overall footfall for the UK on Saturday was down by 1.5 per cent and 1.1 per cent on Saturday and Sunday, suggesting that lingering snow in Scotland and other parts of the frozen north are still hindering shoppers.