Majority of businesses report staff costs as leading source of inflation

Business West’s latest Quarterly Economic Survey has found that staff costs remain the leading source of price pressures for 68% of respondents. This is up 4 percentage points since the same period last year and even higher for manufacturing-based businesses (74%). 

There is a considerable drop this quarter in the number of respondents who are planning to increase their prices in the next 3 months. 40% are expecting to put their prices up in the next 3 months (this has fallen from 45% in Q1 2023). This could be a sign that inflationary pressures are starting to ease. 

Almost 300 businesses from across the South West took part in the survey, with the results revealing that over a quarter of businesses have concerns about the labour market.

We asked employers in the region what the main challenges were in relation to their current workforce. Significantly, 62% of respondents are worried about meeting the expectations of their staff in terms of pay and benefits increases. Workforce retention was a challenge for 37% of businesses, while 36% cited supporting staff morale and wellbeing. 

Chris Payne, Senior Programme Manager at CT Engineering Group, an engineering consultancy based in South Gloucestershire, said:

“Our industry is currently going through a period of high staff demand versus a low resource pool. This is driving up wages and affecting profit margins.”

Alan Broadway, owner of Oval Estates Group, a property company based in Bath, said:

“Two staff have completed degree courses whilst in full time employment. We are currentlyrecruiting a couple of apprentices and train staff internally as required and send them on training courses.” 

Michelle Graham, Director of Niche Recruitment, a recruitment consultancy based in Wiltshire, said:

“We currently have a team member undertaking a Digital Skills Bootcamp which is partially funded through the government and is proving to be hugely beneficial.”

In addition to recruitment challenges, businesses are also grappling with higher costs for new energy contracts alongside reduced government support. This comes as consumer spending is declining and other operational expenses continue to rise. 

Against this backdrop, it is becoming more challenging for firms to protect their profit margins and retain cash to invest back into the business. Whilst 47% of respondents anticipate turnover to increase in Q3, only 36% predict profits to increase compared to Q2. 

Pete Hickerton, Director of PH Sports, a sports coaching company based in Wiltshire, said:

“We are looking at increases in pay for staff and overall costs will have to rise in accordance with this.”

Richard Davis, Owner of DBM Wines, a wine shop based in Bristol, said:

“Costs of goods are still rising, as are staff costs and overheads, so we have to increase costs to stay profitable.”

Whilst the proportion of firms having trouble recruiting has fallen (now 72% compared to 81% in Q1 2023), workforce expansion remains low in Q2 with only 15% of respondents reporting increases in their personnel compared to 3 months ago. This is 4 percentage points lower than this time last year.

Confidence amongst respondents is always higher for their own business than for the wider UK economy. In Q2, both measures are down compared to the previous quarter as businesses continue to face challenges such as inflation, workforce issues, and declining consumer spending.

Matt Griffith, Director of Policy at Business West, said:

“Businesses are facing persistent labour market tightness and while it is positive to see that firms struggling to recruit has fallen this quarter compared to last, the percentage is almost 10 points up since the same period in 2021, during the depths of the pandemic.

“Fierce competition for skills, wage inflation and candidates’ expectations are leaving many businesses with jobs they can’t fill. There appears to be some way to go before the UK economy has a labour market that is delivering the skills and people to support the long-term economic growth we need.”

The silver lining is that wider inflationary pressures from shipping costs and supply chain pressures appear to be easing, meaning some hope that the financial squeeze faced elsewhere is letting up. 

“It is important that the Government supports more people back into work while creating the right conditions for employers to invest in skills to help close the gap and allow firms to grow.”