Consumer businesses pass on higher costs to customers

CONSUMER
Consumer businesses pass on higher costs to customers

What happened?
This week a raft of consumer facing companies announced they are dealing with their higher cost base by raising prices for UK customers amid the cost of living squeeze.

The price of everyday items like burgers, soap and painkillers is rising 
How did we get here? Quite simply the cost of production has soared this year. Everything from energy, animal feed and fertiliser has risen sharply and has been exacerbated by the war in Ukraine. 

As a result consumer good companies have to weigh up whether to pass on rising costs to households already squeezed by high inflation and risk losing customers or keep prices unchanged and take a hit to profits. 

Businesses say they are doing all they can to absorb as much of these rising costs as possible by looking for efficiencies and cost savings in their operations. But they say there’s only so much they can do:

BANKS
Lloyds gets ready for economic downturn

Yesterday Lloyds Banking Group announced it had set aside nearly £400m to cover a possible increase in customers defaulting on loans in a rising interest rates environment.

LBG includes not only Lloyds Bank but a suite of brands like Halifax and Bank of Scotland. This makes it the UK’s largest mortgage lender and holder of savings deposits, its performance is therefore generally seen a reflection of the health of the economy.

During the height of the pandemic in 2020 British banks set aside billions of pounds to cover potential losses from unpaid debts as the economy ground to a halt. But things didn’t turn out so bad, due in part to government interventions like the furlough scheme, and loan defaults remained low. As a result banks released most of these charges last year.

Now with the outlook for the economy again looking uncertain, LBG is getting ready in case customers struggle to repay their debts.

Since December the Bank of England’s base rate has risen from 0.25% to 1.25% to combat rising inflation. Rising rates are typically good news for bank finances, since banks can charge borrowers more for loans and mortgages, which in turn increases their net interest margin – a key measure of profitability and growth.

For the time being LBG says that there are no signs of rising defaults and that staff were being trained to help struggling families manage their finances.

Fellow banks Barclays and NatWest report results this week and the amount they set aside for loan defaults will be closely watched.