British firms absorb rising costs but stop short of passing them fully to customers, Lloyds data shows
Lloyds’ UK Sector Tracker records a three-month high in business cost inflation in August while most sectors hold back on full price increases amid weak demand
Business costs in Britain rose to a three-month high in August as firms faced accelerating input-price pressures, but most sectors have so far refrained from passing the full burden on to customers, according to Lloyds’ UK Sector Tracker.
The bank’s analysis showed costs rose faster in eight of 14 monitored sectors in August and that seven sectors increased the prices they charged at a quicker pace than in July. Despite that, profit-margin data indicated 13 of the 14 sectors did not pass on the full extent of cost increases. "Businesses’ costs continue to rise, and the Tracker shows firms aren’t passing the full extent on to customers," Lloyds senior UK economist Nikesh Sawjani said, adding that firms might change tack if cost pressures accelerate or demand improves.
Sector-level performance was uneven. Food and drink manufacturers experienced faster cost inflation in August, but increased the prices they charged at a significantly slower rate than the previous month even as demand and output contracted. Separate industry data from Worldpanel by Numerator showed supermarket inflation eased slightly from 5.0% in August to 4.9% in September.
Wage inflation and higher employer national insurance contributions were highlighted as major drivers of elevated business costs this year. The rise in labour costs has coincided with signs of softening in the labour market: Office for National Statistics figures show retailers and other sectors have cut thousands of jobs in recent months.
Lloyds’ tracker also reported modest improvements in new orders. Demand measured by new order volumes grew in four of the 14 sectors in August, three more than in July and the highest number of sectors reporting growth since November last year. Software and services was the standout performer, expanding for the fifth consecutive month and reaching a 40‑month high in activity. Nonetheless, August marked the 12th successive month in which demand softened in more than half of the sectors tracked.
The combination of rising input costs and restrained consumer demand has so far limited widespread price transmission to households, which has helped moderate recent spikes in headline inflation. However, Lloyds and other analysts warned that firms could begin to lift prices more aggressively if cost pressures continue to mount or if demand conditions strengthen, a move that would risk feeding through to higher consumer inflation.
Business groups have urged caution on tax policy ahead of the government’s autumn budget, warning that higher levies on employers could further squeeze margins and prompt additional price rises. Chancellor Rachel Reeves is due to deliver the budget on Nov. 26, when firms and markets will look for signals about the fiscal stance and support for businesses facing persistent cost inflation.
The Lloyds data underscores a delicate balance for companies between protecting margins and preserving demand. For now, most firms are absorbing part of the cost shock, but analysts say the situation remains fluid and could add to upside risk for consumer inflation if companies shift to fuller price pass-through.