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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Thames Water CEO quits in shock departure; UK supermarkets deny profiteering; Brexit ‘fuelling inflation’ – as it happened

Inflation United States United Kingdom The British Retail Consortium Asda Bank of England Morrisons NielsenIQ Sainsbury Tesco
The logo of Thames Water, which must now find a new CEO
The logo of Thames Water, which must now find a new CEO Photograph: Dominic Lipinski/PA

Afternoon summary

Time to wrap up. Here are the main developments…

The boss of Thames Water has stepped down with immediate effect weeks after being forced to give up her bonus over the company’s environmental performance.

The company said that Sarah Bentley would leave the board on Tuesday, but will continue to support her interim replacement until a new full-time boss can be found.

UK supermarkets have denied profiteering in the cost of living crisis. Representatives of the Big Four supermarkets told MPs their profits had been hit by soaring costs.

Tesco, Asda, Sainsbury’s and Morrisons and also backed the idea of allowing motorists to find the cheapest petrol and diesel in their area through a ‘transparent’ app.

But they pushed back against calls for caps on essential food, saying it wouldn’t work.

The UK’s largest mobile and broadband companies have been accused of fuelling “greedflation” after pushing through the biggest round of price hikes for more than 30 years.

The House of Lords have heard that Brexit has pushed up UK inflation, having caused a shortage of skilled workers who returned to Europe.

The Lords also heard that the Bank of England deserved a black mark for its recent struggles to handle inflation.

Over in the eurozone, corporate profits were the biggest factor driving up prices last year and will be again in 2023 unless businesses are forced to absorb rising wage bills, the head of the European Central Bank has said.

The growth of electric car production in Britain is under threat from a Brexit “cliff edge” in January unless the EU agrees to delay new trade rules until 2027, industry leaders have warned.

Customers are appalled by the massive price increases for their mobile and broadband services:

Full story: Mobile and broadband firms accused of fuelling UK ‘greedflation’

UK inflation is also being driven higher by the biggest round of price hikes made by mobile and broadband companies for more than 30 years.

The industry is being accused of fuelling “greedflation”, my colleague Richard Partington reports.

Analysis published by the Guardian today reveals that six companies controlling most of the telecoms market all charged a 3.9 percentage point supplement on top of their annual inflation-linked increases this year.

The practice means millions of customers have faced mid-contract price increases of up to 17.3%, which economists said risked prolonging the cost of living crisis and adding to the pressure on the Bank of England to raise interest rates.

Labour accused the government of being “asleep at the wheel” on broadband pricing, while the telecoms regulator Ofcom responded by saying it was “taking a close look” at the issue “to consider whether tougher protections are needed”.

Here’s the full story.

Brexit and 'opportunistic' price rises fuelling inflation, Lords hear

Brexit is one factor fuelling the UK’s inflation problems, says Sir John Parker, Former Chair Court of Directors at the Bank of England.

Testifying to the House of Lords Economic Affairs Committee, Parker says the UK should conduct fundamental ‘root cause analysis’, as would happen in industry after a major accident, to work out why inflation is so high.

He also launched an attack on suppliers for hiking prices, which is also pushing up inflation.

Parker, who admits is not an economist, says:

Quite part from war-induced high energy prices which most countries have been dealing with, the UK – unlike others – are wrestling with the fallout from Brexit, which is impacting business.

Parker says there is a need to understand and admit what business is dealing with, given the “unique range of factors” which are making it hard to draw up accurate economic forecasts

He cites:

  • The drop in sterling, which is fuelling inpost costs

  • The loss of a large number of skilled people who went back to Europe, so there is “now a scramble” to replace them, on higher wages

  • increased friction on imports which he says is depressing productivity at some firms, and certainly increasing costs.

There are other serious non-headline events happening, Sir John says, warning:

There is a range of suppliers who are arbitarily and opportunistically increasing prices, by multiple times inflation.

He cites the example of a small specialised bakery in Devon who are closing down. They have been hit by very sharp price rises – including flour up 104%, margarine up 82%, butter up 89%, and mayonaise up 123%.

These are staggering numbers for a small business, so there is opportunistic drivers going on that must be quite difficult to identify.

He also cites increases in raw materials, and wage increases, hitting construction.

We’ve got a lot of underground forces at work that are… very difficult and very challenging to pick up in the forecasting.

Updated

Lord Macpherson: Black mark for Bank of England over inflation surge

Granting the Bank of England independence to set interest rates has been a success, but the central bank does earn a ‘potential black mark’ for its current struggle to cool inflation, according to a former top Treasury civil servant.

Lord Macpherson of Earl’s Court, former Permanent Secretary to the Treasury, is testifying to the House of Lords Economic Affairs Committee now.

Lord Macpherson insists that independence has been a success, arguing that the outcomes at the Bank have been better than if it had not been given independence (by the new Labour government in 1997).

The last 25 years have generally gone very well, Lord Macpherson says.

He points out that the UK benefitted from the NICE decade, when globalisation and the entry of China into the world economy made it easier to control inflation.

But, he argues there was also real success in changing inflationary expectations in the UK.

Lord Macpherson says there was a minor blip in the financial crisis – when the Bank and the Treasury “didn’t quite understand each other” in the autumn of 2007 [when Northern Rock collapsed].

By the autumn of 2008, “when it really mattered”, we had a much better understanding, Lord Macpherson adds.

But, he says there is a ‘potential black mark’ for what’s happened recently, with inflation soaring over 10% – badly missing its 2% target.

The problems the Bank is grappling with are global, Lord Macpherson says, (such as supply-side shocks from the pandemic and the Ukraine war) although Britain “has its own issues”.

It’s fair to say that all central banks perhaps loosened monetary policy too much, he explains, fearing that we were entering a deflationary period…. and we are now dealing with the consequences.

He adds:

Excessively loose monetary policy, kept in place for too long, has probably facilitated higher inflation than there would otherwise have been, across the Western World.

CityAM editor Andy Silvester is struck by the suddenness of Sarah Bentley’s departure from Britain’s biggest water company.

Updated

Thames Water announces resignation of chief executive

Thames Water has just announced the surprise departure of chief executive Sarah Bentley, weeks after she gave up her bonus over the company’s environmental track record.

Bentley, who joined the company less than three years ago, resigned today, Thames Water say.

Chief financial officer Alastair Cochran, and strategy and regulatory affairs director Cathryn Ross, are stepping up as joint interim CEO immediately, as the company’s board begins the search for a replacement.

In a statement, Sarah Bentley said

“It has been an honour to take on such a significant challenge, and a privilege to serve Thames Water’s dedicated and inspirational colleagues.

The foundations of the turnaround that we have laid position the company for future success to improve service for customers and environmental performance. I wish everyone involved in the turnaround the very best’.

Thames, like other water companies, has faced heavy criticism over the discharge of raw sewage off the UK coast.

It has also struggled to fix persistent pipe leaks, with its leakage rate running at a five-year high.

In May, Bentley was one of several water bosses who gave up bonuses due to the sewage scandal. The previous year, Bentley had received a £496,000 bonus.

But this month, it emerged that the effluent row would not hurt her affluence too much, as Bentley’s pay packet swelled to £1.5m thanks to a a “golden hello” incentive package used to lure her from rival Severn Trent.

Bentley’s replacement will take on the job of pushing through Thames Water’s eight-year turnaround plan, announced two years ago.

Ian Marchant, Thames Water’s Chairman, said:

‘I want to thank Sarah for everything she has done since joining the Company in 2020, building a first class Executive Team and leading the first phase of the turnaround of the Company.

On behalf of everyone at Thames, the Board wishes her every success for the future.’

Updated

Brexit ‘cliff edge’ poses threat to UK electric car production, warns industry chief

The growth of electric car production in Britain is under threat from a Brexit “cliff edge” in January unless the EU agrees to delay new trade rules until 2027, industry leaders have warned.

Electric cars exported from the UK to the EU will have to meet tighter “rules of origin” in the new year, which mean batteries must be sourced from within the two trade partners or face 10% tariffs.

However, as UK and European manufacturers are reliant on batteries from Asia, tariffs appear all but inevitable under the rules.

Mike Hawes, the chief executive of the Society of Motor Manufacturers and Traders (SMMT), said:

“There is huge potential for growth, and that growth is now at risk from tariffs.

“We’re saying basically suspend that requirement, and just let the regulation that’s currently in place flow through to 2027, which is the next threshold.

“We need to make sure those [tariffs] aren’t applied or else there is the real potential that the [electric vehicles] EVs are more expensive and face a tariff whereas petrol diesel don’t.

The warning comes as the SMMT holds its regular summit, where trade secretary Kemi Badenock has spoken:

The GNB Union have hit back at Asda’s claim this morning that they are not threatening workers in the South of England with ‘fire and rehire’ tactics.

As covered earlier, Asda’s chief commercial officer Kris Comerford told the Business and Trade Committee that the supermarket does not use fire and rehire tactics, as he defended removing a 60p per hour supplement for some workers.

Nadine Houghton, GMB national officer, says:

“This is a truly staggering interpretation of events by Asda bosses.

“GMB is currently engaged in consultation with ASDA who are threatening 7,000 workers in stores in the South East with the sack if they don’t accept a 60p pay cut during a cost-of-living crisis.

“If that’s not fire and rehire, I don’t know what is.”

Meanwhile in America, factories have reported a jump in demand for long-lasting products.

New orders for US manufactured durable goods jumped 1.7% month-over-month in May 2023, following an upwardly revised 1.2% rise in April, beating market expectations of a 1% decline.

This is the third month of rising durable goods orders in a row.

Andrew Hunter, deputy chief US economist at Capital Economics, says increased demand for aeroplanes was partly responsible.

The 1.7% m/m rise in durable goods orders in May was stronger than we had expected, even accounting for a big rise in the volatile commercial aircraft component. But the wider evidence still suggests that business equipment investment has further to fall.

Commercial aircraft orders rebounded by 33% m/m, echoing the big rise in orders reported by Boeing. Although that was partly offset by a slump in defence aircraft, overall orders for transport equipment rose by 3.9% m/m last month.

While inflation stayed painfully high in the UK last month, at 8.7%, it has dropped in other countries, including Canada where it’s at a two-year low.

Data just released shows that the Canadian Consumer Price Index rose by 3.4% year over year in May, following a 4.4% increase in April.

This is the smallest increase since June 2021, Statistics Canada reports, due to a drop in gasoline prices (18% lower than a year ago).

Updated

Boots in Oxford Street in London.

In other retail news, Boots has revealed a surge in online shoppers helped bump up its sales over the latest quarter.

The chain said its retail sales, which incorporates beauty, health and electricals products among others, jumped by 13.4% over its third financial quarter.

It reported strong demand for its beauty and skincare range, with No7 products flying off the shelves.

Its online platform saw sales surge by a quarter compared to the same period last year as consumers shopped from home and put more items in their baskets.

The retailer’s pharmacy arm also reported a 5.7% sales increase over the quarter, PA Media adds.

Parent company Walgreen Boots Alliance reported a cut in third-quarter earnings to $0.14, down from $0.34 a year ago, with lower demand for Covid-19 vaccine and tests hitting sales.

It has also cut its profit forecast for this year to $4.00-$4.05 per share from $4.45 to $4.65. This is due to “consumer and category conditions, lower Covid-19 contribution, and a more cautious macroeconomic forward view,” it adds.

Here is a clip from today’s hearing:

Updated

MPs also focused on the hefty pay packets enjoyed by UK supermarket chiefs.

Q: How can Sainsbury’s justify paying almost £4m in bonuses to CEO Simon Roberts, on top of his salary, in a cost of living crisis? He’s on £2,298 per hour, and workers are getting £11 per hour?

Rhian Bartlett, food commercial director at Sainsbury’s, has the unenviable job of defending her bosses pay packet. She points out that board directors’ salaries are set by the remuneration committee, and published, so she can’t comment further on it [post corrected to fix spelling mistake].

Q: Today’s discussion is taking place amid a cost of living crisis – how can you claim your purpose is to provide reasonably priced food for customers when you’re paying dividends and salaries?

None of these witnesses seems keen to address this point.

Updated

Supermarkets won't back price caps on essential goods

Labour MP Ian Byrne then raises the IMF’s new warning that rising corporate profits have driven inflation in Europe (see details here) – at a time when baby formula is being locked up to prevent them being stolen.

Q: Would you, like your counterparts in France, support capping essential items?

Tesco’s commerical director, Gordon Gafa says it’s not possible to compare France and the UK

We don’t believe price caps would be helpful.

Asda’s chief commercial officer, Kris Comerford, agrees.

David Potts, Chief Executive Officer, Morrisons, also isn’t a fan

I would say competition leads you to the right price, actually.

The industry requires volume, and you’ll see it come.

Critics of price caps have argued they lead to shortages, as supermarkets will not want to sell products at a loss and suppliers will take their goods elsewhere.

Asda’s chief commercial officer, Kris Comerford, is then challenged about its alleged ‘fire and rehire’ policy, hitting 7,000 staff in the South East.

Comerford says there was an ‘anomoly’ which means some staff received an extra 60p per hour supplement, due to the higher cost of living in London.

hat is being ‘fixed’, with an 8% pay rise for hourly paid staff last year and another 10% this year – he denies any ‘fire and rehire’ antics.

Supermarkets deny charges of ‘grotesque’ profiteering.

The supermarket bosses appearing before MPs today have insisted they are not guilty of ‘grotesque’ profiteering.

Q: The Unite union general secretary, Sharon Graham, have accused the UK’s supermarkets of a “grotesque display of profeering” at a time when many families are strugging to get food onto the table. What do you say to that?

Tesco’s commercial director, Gordon Gafa, denies it – saying supermarkets make 4p in the pound.

He reiterates that Tesco is not profiteering, saying:

We are the most competitive we have ever been.

Sainsbury’s Rhian Bartlett can beat that…saying her firm’s profit margins are even slenderer.

We make less than 3p in the pound. We’ve also seen profits step back.

Asda’s Kris Comerford says that the 25% drop in Asda’s EBITDA profits last year isn’t consistent with Unite’s claim.

Q: There only a few supermarket chains today, much fewer than in 1978 – so are you actually a cartel, asks Jane Hunt MP.

Asda’s Kris Comerford insists the UK retail market is the most competitive out there.

It’s unusual to be sat alongside rivals who we’re normally competing against, Comerford says.

Jane Hunt MP has done her research, pointing out that the UN’s world food index shows that prices of oils, cerieals, dairy and meat have fallen since last summer.

This tweet (from February) shows it:

Q: Why have shop prices not fallen, and why are own-brand budget items 25% more expensive (according to Which?)? And are your Aldi price-pledges actually pegging prices?

Tesco’s Gordon Gafa denies it, saying Aldi has “very competitive prices” (quite the endorsement for a rival!).

Gafa says that some structural inflation, such as wages, is stickier, and doesn’t fall as quickly as the food commodies tracked by the UN.

Why has food inflation soared?

Onto food price inflation… which rose over 19% in March, the fastest since 1978, points out Jane Hunt, Conservative MP.

Q: Which products have been worst hit, and why?

Morrisons David Potts cites eggs, saying the loss of birds to avian flu led to shortages of poultry meat and eggs.

Q: One producer has told me that their costs only rose by 14%, and they passed that on accordingly – yet egg prices are up 29%. Why?

Potts says wholesale egg prices have gone up a lot more than either figure [although a quick check shows eggs were up 28.8% in the year to May, but egg inflation was higher earlier this year]

Potts adds that he’s hopeful that egg prices will normalise, as farmers have been rebuilding their flocks.

Pork prices have also risen sharply, he says, blaming a reduction in global pig herds just as demand rose.

Rhian Bartlett, food commercial director at Sainsbury’s, says labour costs (wages), energy costs and rising commodity costs have all pushed up food inflation.

It hits fresh and chilled food faster, she explains, so prices of produce, meat, fish and poultry have jumped fastest.

Bartlett adds that wholesale prices have started to ease, leading to price cuts for milk, bread, butter and cheese.

Asda’s Kris Comerford echoes these points, and says shortages of salad earlier this year also pushed up prices.

Q: Are the CMA right that there is evidence that fuel retailers’ profit margins have risen in recent years?

The supermarket representatives seem unwilling to be pinned down on this issue….

Tesco’s Gordon Gafa says this would be “representative of what we have seen”, but he can’t comment specifically.

Kris Comerford says Asda is keen to see the CMA’s report (expected next week).

Sainsbury’s Rhian Bartlett says she doesn’t know the profit margins of other retailers. The CMA are the only ones who can see the full picture.

Morrison’s David Potts says fuel is the lowest-margin product on sale, but yes he repeats that he thinks there is more profit than before.

Q: And will you supply data to an app that helps motorists find cheap deals?

Gafa repeats that Tesco welcomes price transparency, and would be happy to submit data to an app or website.

Bartlett says an open data app is being proposed, that would also factor in the drive time and cost of travelling to a particularly location. Sainsbury’s would be “very supportive” of such an initiative.

Morrison’s David Potts isn’t quite as clear – he says consumers are “very savvy”, and that Morrisons would support anything that gets consumers a better deal.

Comerford says Asda would “definitely” support an app to let motorists find the cheapest fuel in their area. “Why wouldn’t we help?”

Q: Why did Asda abandon its policy of being a ‘loss leader’ at the pump, in favour of profiteering?

Kris Comerford, Asda’s chief commercial officer, denies that its fuel pricing strategy has changed – it still aims to be the best value fuel retailer?

Q: So your profit margins haven’t doubled from 4% to 8%, Jonathan Gullis MP probes….

Comerford repeats that overall EBITDA profits across the business have dropped by 25%, against flat sales.

Q: You’re also making whopping debt payments because your new owners have piled debt onto the company – is that why you are no longer able to make a loss on fuel?

Comerford insists that the ownership change hasn’t affected Asda’s strategy.

Jonathan Gullis MP says he is “very delighted” to hear that the major supermarkets, who control 44% of the fuel market, are backing calls for a “pump watch” website to help motorists see prices at fuel stations across the UK.

Gullis adds that the profit margin for supermarkets in fuel sales has doubled from 4% and 8%, between 2017 and 2022, according to the CMA.

Q: Why didn’t customers see the 5p cut in fuel duty announced in the budget in March 2022?

David Potts says Morrisons did pass on that cut, on the same day. He agrees, though, that there is a bit more profit at the retail end of the fuel market.

Sainsbury’s Rhian Bartlett adds that her supermarket chain would be “very supportive’ if the CMA regulator recommends an open data platform for fuel prices (to give motorists proper transparency into pricing).

The CMA is due to release its report into the fuel market next week, Bartlett adds.

In December, the competition watchdog accused petrol and diesel operators of “rocket and feather” tactics – hiking prices rapidly, but only lowering them slowly…

Supermarkets back transparent system of live fuel pricing

The Business and Trade committee move onto fuel inflation – another factor that has hit households in the last year – and they win a commitment towards a new system of price transparency.

Q: What has caused the increase in fuel prices – both outside and within your control?

Tesco’s Gordon Gafa says the “unfortunate war in Ukraine” caused a significant increase in fuel prices.

More than 90% of the cost at the pump comes from input costs, taxes and duties, he says. So the ‘significant spike’ in prices was mainly due to factors outside Tesco’s control.

Q: But you have huge purchasing power, you buy in bulk, so what can you do to help?

Gafa says prices are around 16p per litre lower today than at the peak of the surge (last week’s inflation report confirmed that prices are indeed lower than a year ago)

A chart of fuel prices

But, he claims that Tesco has little control over the wholesale fuel prices it pays, despite buying from eight different suppliers.

Q: There is little transparency over pricing – unlike in Northern Ireland – have you given any thought to improving this?

Gafa says Tesco pricing is structured to ‘compete locally’, with prices spread by about 10p per litre around the UK.

On transparency, he points out that prices are displayed on large screens outside Tesco stores (!) (not that motorists want to drive around looking for good deals).

Unimpressed MPs point out that fuel retailers have to display prices outside their forecourts.

Gafa says Tesco would “welcome more transparency” on fuel pricing, and would welcome a system such as in Northern Ireland where drivers can check the average fuel prices at every petrol station online (this has been credited with keeping prices lower in NI).

Q: Would you all commit to a system to give live fuel price transparency?

Kris Comerford, chief commercial officer at Asda, and Rhian Bartlett, food commercial director at Sainsbury’s, both reply “yes”.

Morrisons CEO David Potts is slightly more equivocal, saying that his supermarket would be happy to look at “anything that can benefit consumers”.

Updated

Q: We’ve heard about Asda employees having to use food banks to pick up food from their own supermarket, so are you all living wage employers?

Tesco’s Gordon Gafa says they are a real living wage employer, yes.

Asda’s Kris Comerford and Sainsbury’s Rhian Bartlett say they are too.

David Potts says Morrisons pays at least £10.92 per hour to workers, ahead of the National Living Wage of £10.42, and a 15% discount at Morrisons stores.

There’s some relief for Morrisons CEO, David Potts – their profits are lower in the last financial year than before the pandemic, Darren Jones MP points out.

So they can’t be accused of boosting their profits….

Potts runs through Morrisons’ efforts to help in the cost of living crisis, including £4m to food banks (on top of £8m of products from its customers). That’s on top of £12m donated by Morrisons earlier in the pandemic.

Potts adds that he reported last week that Morrisons profits are down 10% in the last six months, which he attributes to price cuts that have put it close to Aldi and Lidl prices than ever before.

Morrison’s new budget brand is growing fast, he adds, insisting that Morrison’s is making sure these cheaper products are visible to shopper too.

Sainsbury: We're not passing on full cost rises to consumers

Sainsbury’s profits have also risen “significantly” since before the pandemic, Darren Jones MP points out.

He says pre-tax profits have risen from £239m in 2018-19 to £854m in 2021-22.

Rhian Bartlett, food commercial director at Sainsbury’s, says the company is ‘acutely aware’ of the impact of the cost of living squeeze on customers and its own staff.

Bartlett says Sainsbury’s has spent £560m keeping prices low – citing its own Aldi price match, its economy range, and a price-lock on some products.

Bartlett insists that Sainsbury is not passing on the full impact of rising costs to customers, and that profits were £690m in the last financial year.

She tells MPs:

We are inflating behind our input costs, and we are inflating – wherever possible – behind the market.

Asda quizzed about rising borrowing costs

Kris Comerford, Asda’s chief commercial officer, chips in, saying that Asda’s sales were flat year-on-year in 2022, but EBITDA profits fell 25%.

That shows how Asda has ‘managed’ the impact of factors pushing up inflation, including supply chain problems, the weak pound and the war in Ukraine.

Comerford says Asda launched a ‘just essentials’ price range, launched a loyalty programme, and cut some prices and pledged to keep them low – and also letting children eat for £1.

Darren Jones MP points out that Asda’s financial results are hard to read.

But he points that Asda’s cost of borrowing has surged – from £66m in 2018-19 to almost half a billion pounds in 2021-22.

Q: Why are your debt payments so high, and what does that mean for your customers?

This increase follows the takeover of Asda by EG Group, owned by billionaire brothers Zuber and Mohsin Issa.

Comerford says this ownership change has been ‘factored in’, and despite the impact Asda is still ‘investing in the customer offer’, he insists.

Updated

Tesco denies making more profits

BEIS committee chair Darren Jones, Labour MP, asks the supermarket bosses whether they have been doing enough to help strugging customers, given accusations that they’ve been making increased profits.

Gordon Gafa, commercial director at Tesco, takes the opportunity to advertise his firms offers.

He says Tesco is the “most competitive we have ever been”. He cites the Aldi price match pledge – which mean 700 lines are price-matched to Aldi’s pricing, a low prices pledge covering 1,000 product lines, and 8,000 prices which are lower for Clubcard holders.

Gafa insists that Tesco has not been profiteering, saying:

We have not made more profit year-on-year, we have actually made 7% less profit versus our last financial year.

It’s important to be clear at the outset on that point.

Jones reveals he has been comparing Tesco’s financial performance to the year before the Covid-19 lockdowns. In 2018-19, Tesco made a proft of £1.6bn, but in 2021-22 you made a profit of £2.03bn

Q: A very basic review of your accounts shows you’ve increased profits quite significantly….

Gafa says Tesco’s profitability has hovered between 3% and 4% over the last four or five years, and reiterates that profits year-on-year are down.

He says Tesco has also pushed through cost savings, and lifted wages by 15% over the last year.

Q: But the public will see that your profits have risen since the Covid-19 pandemic – how are you making hundreds of millions of pounds more, given the pandemic, energy crisis, and increased costs for suppliers?

Gafa cited adjusted operating profit figures showing that Tesco made £2.6bn in both 2019 and again in 2022-23.

Watch MPs quiz supermarket bosses live

MPs begin hearing into UK price rises

Over in parliament, senior figures from four of the biggest supermarkets are about to be quizzed by MPs on the cross-party Business and Trade Committee.

MPs will question them on food and fuel price inflation and whether prices will soon fall, hours after retailers reported a slowdown in price rises this month.

Appearing before the committee, we have…

  • Rhian Bartlett, Food Commercial Director, Sainsbury’s;

  • David Potts, Chief Executive Officer, Morrisons;

  • Gordon Gafa, Commercial Director, Tesco;

  • Kris Comerford, Chief Commercial Officer, Asda;

Two dovish Bank of England policymakers are speaking this morning, days after they opposed last week’s large increase in UK interest rates.

Monetary policy committee member Swati Dhingra warned that the external shock which hit the UK has not yet worn off.

Speaking at a conference organised by The Royal Economic Society, Dhingra pointed out there is a time lag between moves in inflation and that scale of demands by workers for increased pay (a point Christine Lagarde also made this morning).

Dhingra said:

“There’s naturally a lag in terms of how wages are responding to consumer price inflation.”

Fellow MPC member Silvana Tehrehro, who leaves the committee early next month, has just presented a paper to the ECB’s Forum on Central Banking in Sintra, Portugal.

She explained that as monetary policy works with a lag, building towards peak effectiveness after 12-18 months, it doesn’t always make sense for a central bank to raise interest rates sharply to combat an energy price shock – as that can lead to below-target inflation further ahead.

A chart from a speech by BoE policymaker Silvana Tehrehro

However, if ‘a sequence of negative supply shocks’ keep inflation above target for longer, then a ‘tighter monetary policy response’ could be justified, she says.

The paper is online here.

A chart from a speech by BoE policymaker Silvana Tehrehro

Christine Lagarde ends her speech in Sintra by warning that the European Central Bank cannot end its interest-rate hiking cycle yet.

With eurozone inflation at 6.1% in May, three times the ECB’s target, Lagarde says the ECB must not ‘waver’ in the fight for price stability.

She tells delegates in Portugal:

Monetary policy currently has only one goal: to return inflation to our 2% medium-term target in a timely manner. And we are committed to reaching this goal come what may.

As the author Helen Keller wrote, “our worst foes are not belligerent circumstances, but wavering spirits”.

We have made significant progress but – faced with a more persistent inflation process – we cannot waver, and we cannot declare victory yet.

Lagarde: eurozone wages to rise, adding to inflation challenge

The head of the European Central Bank has warned that inflation in the euro area is too high and is set to remain so for too long.

Speaking at the ECB’s annual gathering in Sintra, Portugal, Christine Lagarde warns that “the nature of the inflation challenge”, as workers push for pay rises to help protect them from inflation.

Lagarde explains that inflation is working its way through the economy in phases, as different economic agents try to pass on the cost to each other.

Tthe first phase of the inflation squeeze was led by companies, Lagarde, explains, as they protected their profit margins by lifting the prices they charge consumers, after their input costs jumped.

Lagarde explains that this was unusual:

The sheer scale of input cost growth made it harder for consumers to judge whether price hikes were caused by higher costs or higher profits, fuelling a faster and stronger pass-through.

Now, though, price growth is fading, helped by the drop in energy prices.

But, Lagarde says, European workers are pushing for wage increases that recognise the impact from inflation. The ECB now expects wages to grow by 14% in real terms by the end of 2025.

She explains:

Workers have so far lost out from the inflation shock, seeing large real wage declines, which is triggering a sustained wage “catch-up” process as they try to recover their losses.

This is pushing up other measures of underlying inflation that capture more domestic price pressures – particularly measures of wage-sensitive inflation and domestic inflation.

This, Lagarde says, means that the task of taming inflation is not yet over – and the ECB must maintains restrictive condition until this second phase of the inflation process has ended.

She adds that the ECB is likely to raise interest rates again next month, saying:

Barring a material change to the outlook, we will continue to increase rates in July.

The latest UK mortgage rates

UK mortgage rates have nudged a little higher today.

Moneyfacts reports that:

  • The average 2-year fixed residential mortgage rate today is 6.26%, up from 6.23% on Monday.

  • The average 5-year fixed residential mortgage rate today is 5.87%, up from 5.86% on Monday.

Lenders cut the number of residential mortgage deals available too, to 4,426 from 4,483 yesterday.

Buy-to-let mortgage rates also rose again:

  • The average 2-year buy-to-let residential mortgage rate today is 6.51%, up from 6.49% on Monday.

  • The average 5-year buy-to-let residential mortgage rate today is 6.41%, up from 6.39% on Monday.

There are currently 2,416 buy-to-let mortgage products available, a drop on yesterday’s 2,459.

European stock markets have opened higher, after Chinese Premier Li Qiang declared his country was still on track to reach its annual growth target of around 5%.

Speaking at the World Economic Forum’s Annual Meeting of the New Champions (a less snowy version of Davos) in Tianjin, China, Li predicted that growth in the second quarter of this year would be faster than in Q1.

Li added:

“From what we see this year, China’s economy shows a clear momentum of rebound and improvement.”

Shares in mining companies have risen, on hopes that China’s recovery was not faltering, helping to push the FTSE 100 a little higher in London (up 9 points at 7463 points).

Li also criticised Western governments for cutting trade and business ties with China, saying:

“Governments should not over-reach themselves, still less stretch the concept of risk or turn it into an ideological tool,”

JD Sports reports 'some softening' in US trade

UK high street retailer JD Sports has reiterated that its profits will hit market expectations this year, despite a slowdown in the US.

Ahead of its AGM today, JD Sports reports that sales grew by 8% in May, a slowdown on the 15% growth reported earlier in the year.

It adds:

The positive trends have continued through June in the Group’s businesses in the UK, Europe and Asia Pacific although the growth from these regions is partially offset by the businesses in North America which are experiencing some softening in trade consistent with other businesses in the sector.

Inventories in our businesses in North America are at normal levels and we will be no more promotional than we need to be to remain competitive.

JD Sports adds that it expects pre-tax profits for the year to 3 February 2024 will be in line with the current average consensus expectations of £1.04 billion.

But share in the company are down over 4% in early trading, as traders digest its warning of a softening in demand in the US….

Updated

UK 'to be pushed into recession' by interest rate hikes

The Bank of England will push the UK into recession by the end of the year in its battle to curb inflation, according to new predictions from Bloomberg Economics.

With UK inflation higher than other G7 countries, they forecast that the UK will enter a year-long recession in the final three months of this year. This would be a shallow recession, wiping out just over 1% of economic output, in the run-up to the next election.

That is based on the BOE raising rates to 5.75% by November, from 5% today. The markets, though, forecast rates will hit 6% by the end of the year.

Economists Dan Hanson and Ana Andrade say:

“The risk is the data continue to prove unresponsive to the BOE’s actions and interest rates rise further than our baseline.

As borrowing costs move above 5%, we think the risk of a financial stability shock increases exponentially.”

Updated

Victoria Scholar, head of investment at interactive investor, points out that UK supermarkets have recently been cutting prices, helping to lower food inflation.

She explains:

“The British Retail Consortium’s shop price inflation hit 8.4% in June falling from 9% in May which was the highest since records began in 2005. Food price inflation fell for the second consecutive month but remains at 14.6%, sharply above the headline rate of inflation.

Last week’s inflation figures from the ONS signal that bringing down inflation is proving to be a lot more difficult than expected. Prime Minister Rishi Sunak’s goal to halve inflation by year-end looks less and less likely as the months go by, despite aggressive monetary tightening from the Bank of England which has caused shockwaves across the mortgage market.

Supermarkets have been cutting their prices lately in an attempt to lure in increasingly cost-conscious customers. Sainsbury’s for example this week invested £15 million to cut prices on own brand items like pasta and jams. The highly price competitive German discounters, Aldi and Lidl have forced UK supermarkets to participate in the fierce price competition, with any abstention putting the likes of Morrisons, Asda and others at risk of losing market share.

Supermarket executives will face questions from MPs at the business and trade committee today responding to questions about soaring food price inflation which has been exacerbating the cost-of-living crisis.

Food businesses have been accused of ‘greedflation’, profiteering from inflation by failing to pass on falls in energy and other prices to consumers through lower prices. This is something that companies like Sainsburys and Unilever have strongly denied.

Rising food prices have detrimental effect on mental health

Soaring food prices are damaging the mental health of shoppers, particularly younger families, consumer group Which? warns.

A new survey from consumer group Which? shows that rising prices of everyday groceries has worsened the mental health of a quarter (25%) of people.

It also found that:

  • Some 23% say that rising food prices has hindered their ability to eat a healthy diet, while 22% said they had lost sleep over food costs, and one in five said their physical health had deteriorated.

  • Three in 10 women (30%) said their mental health had worsened as a result of soaring food prices.

  • A third of people aged 35 to 54 – those most likely to be parents of young families – said food costs had had a negative impact on their mental health.

  • They were more likely to be negatively affected than those aged 18 to 35 (27%) and over 55 (18%).

Which? head of food policy Sue Davies says the government must ensure retailers offer essential budget items in all their shops, to help those strugging.

“Women and young parents are among the worst affected and some people struggling to feed their children are asking themselves how much more of this they can take.

“Now is the time to act. The government must urgently get supermarkets to commit to stocking essential budget ranges in all their stores, particularly in areas where people are most in need, as well as make pricing much clearer so shoppers can compare prices and find the best value products.”

IMF: Rising corporate profits driving Europe’s inflation

Rising corporate profits account for almost half the increase in Europe’s inflation over the past two years.

That’s the verdict from the International Monetary Fund this morning, which reports that companies increased prices by more than spiking costs of imported energy.

In a new blog post, the IMF says profits account for 45% of price rises since the start of 2022. The surge in import costs after Russia’s invasion of Ukraine also drove eurozone inflation over 10% last year, they point out.

This means that Europe’s businesses have so far been shielded more than workers from the adverse cost shock, the IMF write:

Profits (adjusted for inflation) were about 1 percent above their pre-pandemic level in the first quarter of this year. Meanwhile, compensation of employees (also adjusted) was about 2 percent below trend.

So, if Europe is to hit its inflation targets, and workers receive pay rises to make up for inflation, companies must accept a smaller profit share.

The IMF explains:

Should wages increase more significantly—by, say, the 5.5 percent rate needed to guide real wages back to their pre-pandemic level by end-2024—the profit share would have to drop to the lowest level since the mid-1990s (barring any unexpected increase in productivity) for inflation to return to target.

This research adds to the debate over ‘greedflation’ – where companies whack up their prices faster than is justified by rising costs….

However, recent data from the UK showed that the profitability of British private non-financial companies remained stable in the final quarter of last year – suggesting that higher corporate profit margins were not pushing up UK inflation.

Last night Gita Gopinath, the first deputy managing director of the IMF, warned that inflation is taking too long to get back to target.

She told the ECB’s annual conference in Sintra, Portugal:

“While headline inflation has eased significantly, inflation in services has stayed high, and the date by when it is expected to return to target could slip further.”

Updated

Wales to clamp down on junk food meal deals to tackle obesity

Clampdowns on unhealthy meal deals and supermarket temporary price reductions for foods high in fat, sugar or salt are to be introduced in Wales.

The move is part of a push to tackle the obesity crisis, my colleague Steven Morris reports.

With almost two-thirds of adults in Wales overweight or obese, the Labour-led government announced it would go further than England in framing laws designed to tackle the promotion of ultra-processed foods.

The government said it intended to match the UK government’s plans to curb volume promotions such as buy one get one free in England. It also revealed proposals to tackle meal deals and temporary price reductions, arguing it needed to do more because of the scale of the crisis.

More here.

Clothing and electrical goods at UK shops also saw falling prices this month, the British Retail Consortium reports, “helping customers to pick up a bargain ahead of the summer holidays”.

Inflation has proven particularly sticky in the UK with the consumer prices index rising the same amount in May as the previous month, points out Bloomberg.

They add:

A larger-than-expected Bank of England rate rise last week jolted markets and drove up the cost of mortgages.

Supermarkets are under scrutiny as food price inflation has remained at elevated levels. However, bosses have pushed back against the idea that grocers are profiteering.

Full story: Shop price inflation easing, say top UK retailers before key meeting with MPs

MPs will hold a ‘crunch meeting’ with the UK supermarket industry today, my colleague Richard Partington writes.

Senior executives from Tesco, Sainsbury’s, Asda and Morrisons will be questioned over soaring prices on Tuesday by MPs on the cross-party business and trade committee, with a focus on their profit margins, competition in the supply chain and when shoppers can expect to see a significant fall in prices.

Ministers have explored the option of supermarkets adopting a voluntary price cap for the price of basic food items, but have insisted they would not impose limits on the industry.

Last week, chancellor Jeremy Hunt brushed aside calls for caps on basic food products, saying he didn’t believe it was “the right long-term solution”.

Updated

Introduction: UK's surging shop price inflation eased in June

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Food inflation has been one of the worst elements in the cost of living crisis, but there are signs that the squeeze is easing, with prices in shops rising at a slower rate.

Shop Price annual inflation decelerated to 8.4% in June, down from 9.0% in May, according to the latest data from the British Retail Consortium and NielsenIQ.

Within that, food inflation decelerated to 14.6% in June, down from 15.4% in May. That’s still a desperately fast rate of price increases, but it could signal that inflationary pressures are easing.

Average basic pay rose by 7.2% per year in the three months to April, so food prices are accelerating twice as quickly.

But still, households up and down the country will welcome the easing of shop price inflation in June, says Helen Dickinson, OBE, chief executive of the British Retail Consortium.

“If the current situation continues, food inflation should drop to single digits later this year.

Fresh food prices were 15.7% higher than a year ago down from the 17.2% inflation rate recorded in May. That was driven by retailers cutting the price of many staples including milk, cheese and eggs.

The slowdown follows a drop in global food commodity prices, which spiked after the full-scale invasion of Ukraine more than a year ago.

Mike Watkins, head of retailer and business insight at NielsenIQ, explains:

“Whilst prices are still higher than a year ago, the slowdown in food inflation is welcome news for shoppers, helped by supermarkets lowering prices of some staple goods.

And if global supply chain costs continue to fall, we may now be past the peak of price increases. However, with most households needing to save money, purchasing behaviour for the rest of this year is still likely to shift towards essential needs with discretionary consumption being deprioritised or delayed.”

UK shop price inflation data to June 2023
UK shop price inflation data to June 2023 Photograph: BRC

Falling inflation does not mean that prices are falling – simply that they are rising at a slower rate, compared to a year ago.

This morning’s data arrives ahead of a crunch meeting at parliament, where MPs will question key figures from the supermarket industry on rising food and fuel prices, and ask whether shoppers will see price falls soon.

They’ll hear from David Potts, the chief executive officer of Morrisons, and senior staff from J Sainsbury, Asda and Tesco.

The UK’s Groceries Code Adjudicator, Mark White, will also testify, and outline its plans to ensure retailers treat their direct suppliers lawfully and fairly.

Yesterday, Sainsbury’s announced plans for another £15m of price cuts on essential staples, including own-brand pasta, rice, cornflakes and jam.

We’ll hear more from inflation today, as the European Central Bank holds an annual seminar in Sintra, Portugal.

The agenda

  • 9am BST: European Central Bank president Christine Lagarde speaks at ECB’s central banking forum

  • 9.30am BST: Bank of England policymaker Silvana Tenreyro gives a speech on “Monetary policy in the face of supply shocks: the role of inflation expectations”

  • 10.10am BST: Business and Trade Committee hearing on rising food and fuel prices

  • 1.30pm BST: US durable good orders for May

  • 3pm BST: US consumer confidence report for May

Updated

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