This morning the Telegraph is reporting that Lord Wolfson of Next believes that in negotiating their forward contracts for mid-2023 they are seeing signs of falling prices later in the year. This of course should also filter through to customers and individuals who are feeling the pinch from price rises. The view is that we are not there yet and these positive signs won’t detract from 2023 being a hard year, with inflation remaining at around 6% towards the end of the year.

It also highlights comments from Silvana Tenreyro at the Bank of England in November that UK interest rates have peaked at 3.5%.

There seems to be significant confidence in the market and in Government that inflation will fall quickly this year. This is perhaps evidenced by Rishi Sunak’s inclusion of falling inflation as a benchmark of the Government’s performance. Given the difficulties that countries have had with inflation in the past this may seem a little optimistic, but it comes from the belief that economists are able to breakdown current inflation into chunks, each driven by understandable causes. This would be gas prices, supply problems and quantitive easing, as well as general expectations as to where prices will end up.

Although the troubles in Ukraine are continuing, gas prices are falling due to a milder winter allowing nations to fill their storage facilities, particularly with liquefied natural gas being sourced globally. This has had the effect of easing energy market traders expectations as to the winter of 2023. In addition, most western nations including the UK have embarked on monetary tightening by rising interest rates. Finally, for the most part Asian supply lines have opened up which is also assisting in bringing prices down, although clearly China continues to have ongoing issues.

How will this effect UK companies?

I think fair to say, as Lord Wolfson suggests, 2023 is still going to be a difficult year. Although the various causes of inflation are being addressed, the complexities of each element mean there is room for drag or a reversal of the position.

Gas supply issues have eased, but there remains no medium/long term solution to the supply of gas other than the increase in supply from “friendly” nations. The long term requires a reduction in the use of gas by the UK with a potential economic shock being the Damocles sword that hangs above price reduction. Significant energy costs are currently draining UK business cash reserves with the temptation for businesses to try to pass costs on to customers thereby perpetuating inflation. For those that can cannot pass the cost on, insolvency is a significant risk.

The ongoing Covid issues in China may still cause supply chain issues for UK companies and it is not apparent how long it will take the Chinese population to acclimatise to the spread of the virus. This could tie UK business working capital up while matters are resolved, again putting pressure on available cash reserves.

The Bank of England have sought to restrict the money supply with higher intertest rates, but this will cause ongoing pressure on businesses already saddled with significant debt hangover from the Covid years. This could result in a more zombie companies, unable to invest but limping on, with a short-term outlook.

Finally, inflation will be perpetuated by wage expectations which, given the current level of strikes, shows no sign of calming down. The additional adverse effects on businesses due to the strikes will be significant, say for example hospitality businesses already reeling from customers only working at their offices three days a week.

There are clearly reasons to hopeful that the economy will improve throughout the course of the year with improved trading conditions for business. However, there remain significant risks, creating an environment in which significant business failure is possible and potentially highly probable.