The cost of living is set to be the dominant domestic issue facing business and political leaders this year. As the cost of food, fuel and energy continues to rise so too does the cost to hire staff and to manufacture and transport goods around the world.

But where did it start, where will it end and what does it mean for consumer sector businesses?  

The causes are complex and global in nature. Following the relaxing of Covid lockdown restrictions, global manufacturing hubs came back online and were faced with high demand but also severe shortages and delays. The costs of shipping containers, commodities and raw materials started to rise creating inflationary pressures on the international supply chain. Continued lockdowns in China and the Russian invasion of Ukraine further exacerbated the challenges.  

The consequences for the UK economy are equally multifaceted. The red flags are already starting to appear, all pointing to a weakening in consumer confidence, reduced spending power and potential recession.

The labour shortage remains a critical unresolved issue. Evolving out of the uncertainty of Brexit and the restrictions of Covid, the shortage is the result of many EU nationals leaving the UK and simply not returning. The pandemic also encouraged people to reconsider their long-term career objectives and leave the workforce earlier through retirement. Recent reforms to the immigration system have also made it harder for people to move to the UK for work. Sectors such as agriculture, retail, hospitality, logistics, leisure and tourism are being hit particularly hard as a result.  

One positive of the labour shortage is that many people now find themselves in jobs they previously did not have. The UK is near to ‘full employment’. Businesses however have been left scrambling to offer pay increases to retain or attract workers and many are still operating with reduced capacity.

How can policymakers help? 

The Bank of England has effectively admitted there is a limit to what it can do. Interest rates will continue to rise but when mounting food and energy costs are not down to excessive consumer consumption this approach will just heap greater pressure on hard pressed households already struggling.

Regular reviews of the Shortage Occupation List will go some way to identifying the sectors and skills in most need of support. A flexible approach to the points-based immigration system may also help attract overseas workers. Reductions in income tax, VAT or National Insurance would be welcomed by consumers although these are unlikely, particularly as NI was only recently increased to support the NHS recover from the pandemic. 

Imposing a windfall tax on highly profitable oil and gas businesses may be a popular quick win - voters are unlikely to shed a tear for big business. Government should ensure that any increased tax is not made permanent, does not deter inward investment and does not limit funding for the UK’s energy infrastructure which is so urgently required.

What is the outlook for businesses? 

The steep increase in the cost of living will undoubtedly hit certain groups harder than others. Those with variable rate mortgages, younger people in the early stages of their careers and those on lower and fixed incomes who spend proportionally more of their money on essentials will be impacted most.

As consumers reign in on discretionary spending patterns may shift; eating out less but spending more on eating better at home, for example.  

Seasoned entrepreneurs often talk of innovation being forged in the fires of crisis. As established patterns of behaviour are broken rapid adoption of new alternatives are required. It is certainly true that in the new post Brexit, post Covid economy there is opportunity to do things differently.

Many employers now understand their role in supporting the health and well-being of their employees. Manufacturers are looking at bringing production back to the UK in a bid to create shorter, more visible and resilient supply chains. Establishing UK energy security is now front of mind for government. So too is a net zero economy and new technologies are emerging as a result of this focus - those in the battery and hydrogen sectors, for example, are understandably excited by the great potential that exists. 

The talk of trade deals should also remind business leaders that there is still potential in new overseas markets, particularly beyond the immediate horizons of the EU. Indeed, Irwin Mitchell is part of a global network of elite law firms and is actively supporting many clients on their international expansion plans.

Invest and innovate

The next 12 months will undoubtedly be challenging and targeted support for those most in need will be required soon. So too will investment in skills, data, analytics and digital technology to enhance logistical operations, reinforce supply chains, increase product choice and deliver flexible payment options. These investments will improve the overall ‘experience’ consumers are looking for.

Although the labour market remains remarkably resilient for now, there is no easy shortcut to avoid the tough times ahead. Consumer sector businesses should instead focus on what they do best: being innovative, listening to customers, collaborating with partners and adapting quickly to change.