Inflation is only just beginning. Suppliers and retailers have a rocky road ahead

Inflation is a curse for many, and this series of seemingly relentless costincreases is far from over. Back in September 2021, I predicted inflation wouldtop 5% before Christmas on BBC’s Today programme. Seeing the ONS published 5.4%for December, I feel obliged to add my view to the matrix of analysts assessingwhere it is heading in 2022.

Mine is a unique insight that comes from a position running the leadingconsultants advising suppliers on the what, how and when of their cost priceincreases. The sheer number of suppliers across all food categories of thestore, and the levels to which they need to offset input costs, point toa brutal extrapolation: we will see over 8% overall inflation, with food over5%. Yes, the second wave is bigger than the first: food inflation in Decemberwas 3.5% according to Kantar data, or 4.5% in the same period in the Grocer 33.With their tight margins, retailers will have no choice but to pass this on tothe consumer.

Suppliers face double jeopardy on price moves: a risk of fallout withretailers, and a risk of higher pricing choking demand from consumers. Asa result, they constantly negotiate themselves down on levels, and this has ledto many communicating a second increase in as little as four months. Consistentwith their reluctance to hike cost prices, suppliers are now searching forsigns that input costs may be plateauing.

Apart from shipping costs, I can’t see it happening. Labour, fuel, drivers andCO2 costs are all set to rise in 2022 as well as 80% of the key raw materialcommodities. These will all have a knock-on effect, causing an upward spiral.Gas bills could hit grocery after April, when a quarter of UK homes will bespending up to 10% of their disposable income on fuel, but I expect thegovernment will plan to help on bills.

Within our industry, of course, inflation can be a blessing – but no-one willadmit it, and especially not retailers. Most suppliers don’t understand thatretailers need inflation, given the stink they create around CPIs. Retailersmake higher cash profit at higher retail price assuming they maintain theirmargins, so pricing alone can enable them to hit targets.

Their only risk is the danger of falling out of line with the discounters.Given however that only Waitrose has increased prices more than the discountersover the past year, suppliers can relax.

So take an honest level and futureproof it. The pain of the retailer challengedoes not increase proportionately with the size of the rise.

If inflation was a box-set, we’d only be watching episode three of six in thisseries. If only we could binge-watch straight to the end.

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