Alcohol Duty or Minimum Wage Rises Increasing Inflation?
Published / Last Updated on 17/01/2024
Today we saw news that UK CPI inflation had increased in December 2023 from 3.9% pa to 4.0% pa. This increase was a surprise (allegedly) for many commentators and journalists.
See: CPI 4.0% RPI 5.2%
Office for National Statistics (ONS) figures show that the biggest contributors to higher inflation were:
- Food and non-alcoholic beverages.
- Alcohol and tobacco.
- Household goods.
This was perhaps no surprise with the festive season build up as well as more spending on getting your home and food ready for the festive season.
That said, you cannot simply blame alcohol or tobacco duty increases in August 2023 (first time since 2020). Duties on all alcohol did go up but a new Draught Relief was introduced to reduce the rates of duty on draught ciders, beers, wines, spirits and other fermented products. In short, bottled/canned products went up but most draught drinks duties at your local pub or restaurant hardly did.
The net effect on revenue to HMRC is that it is down, this means we are actually paying less overall in duties, but prices still went up.
So, what is the real cause of this inflation increase?
- Container ships and oil tankers being forced to divert away from the Red Sea and Suez Canal to go around the Cape of Good Hope (South Africa) increasing delivery times and costs.
- Minimum wage increases up to 21% due in April 2024 forcing many hospitality businesses to increase their costs.
Hospitality, pubs, restaurants, retail businesses and supermarkets usually have a younger age profile for employees. A-level students, university students and young workers are the majority workforce in these sectors.
National living wages increase in April 2024 as follows:
|
Age Band |
Current Minimum Wage 2023 |
New Minimum Wage from 1 April 2024 |
% Increase |
|
National Living Wage 23ys+ |
£10.42 per hour |
£11.44 per hour |
9.78% |
|
National Minimum Wage 21-22ys |
£10.18 per hour |
£11.44 per hour |
12.4% |
|
National Minimum Wage 18-20ys |
£7.49 per hour |
£8.60 per hour |
14.8% |
|
National Minimum Wage Under 18ys |
£5.28 per hour |
£6.40 per hour |
21.2% |
|
National Minimum Wage Apprentice |
£5.28 per hour |
£6.40 per hour |
21.2% |
Imagine you are a supermarket with thousands of part-time 16-20 year-olds? They are facing payroll cost increases on those younger workers of between 21.2% and 14.8%. In addition, older and more senior workers will also expect a pay rise if their younger counterparts are getting one. Combine this with festive season demand and employers needs to retain employees, many employers have already started to increase prices and continue to do so.
We suggest the increases to minimum wage will be the real driver of UK inflation currently.
Inflation Bubble
Based upon the above, we expect inflation to remain stubborn for the next few months and even increase. This means there is now no ‘wiggle room’ for the Bank of England to cut interest rates in the short term and we expect inflation to remain high, interest rates to remain high and the UK economy to teeter on the brink of recession.
We cannot see UK interest rates coming down until Autumn 2024 at the earliest and more likely 2025. Stock markets have already reacted badly to the inflation increase although, inflation is still below where it was 2 months ago.
