Inflation in the UK will not return to levels seen before Russia’s invasion of Ukraine because of rising wages, a senior executive at Associated British Foods has said.
Eoin Tonge, finance director at the food-to-fashion group that owns Primark and makes Kingsmill bread and Twinings tea, said: “Labour inflation is going to keep inflation higher. You can’t get away from that.
He added: “Food inflation will remain sticky because of labour inflation as well.”
Inflation in the UK rose unexpectedly for the first time in nearly a year to 4 per cent in December, official figures released last week showed, dampening hopes that the Bank of England would lower interest rates in a matter of months. UK food inflation fell to 6.7 per cent in December, the lowest rate since June 2022.
Tonge said food inflation would continue to decelerate through price decreases, but “not at the level that people would hope for” because of wage inflation.
His comments echo concerns from Marks & Spencer and Tesco, whose bosses warned this month that “continued pressure” from wage growth would act as a significant drag on growth for businesses this year.
Official figures showed that average weekly earnings, excluding bonuses, rose 6.6 per cent on a rolling annual basis in the three months to November. The Office for Budget Responsibility has forecast wage growth of 3.7 per cent this year, with a new rise to the minimum wage kicking in this spring.
Associated British Foods, which is listed on the FTSE 100 and is controlled by the billionaire Weston family, pointed to higher full-year profits after strong trading over Christmas at its discount retailer Primark and in its food and grocery businesses.
The group did not provide profit guidance but said it looked forward to a year of “meaningful” progress in both profitability and cash generation, with the improvement in profitability driven by a “recovery” in margins at Primark.
It also attributed the upbeat forecast to a “marked” improvement in profitability at British Sugar and reduced losses at Vivergo, the biofuels business.
Analysts had previously forecast an adjusted operating profit of £1.81 billion, up from £1.51 billion last year. Barclays now expects it to deliver profits of £1.86 billion.
Associated British Foods operates in 50 countries. As well as running more than 400 Primark shops, it makes products such Ryvita crackers as well as bakery ingredients such as flour and yeast. The company is also a leading producer of cane sugar and sugar beet with brands including Azucarera, Illovo, Whitespoon and British Sugar.
Across the group, total revenue increased by 5.4 per cent to £6.9 billion in the 16 weeks to January 6. Revenue at its grocery and ingredients business rose 5.4 per cent and 0.9 per cent to £1.4 billion and £698 million respectively.
Tonge reiterated previous comments that food manufacturers could not be profiteering from high inflation by keeping prices artificially high.
“The UK is so competitive and I just don’t think there is anywhere to hide in terms of margin,” he said, adding that trying to find evidence of profiteering in the sector would “be like looking for a needle in haystack”.
Revenue at Primark, one of Europe’s biggest fashion retailers, rose 7.9 per cent to £3.4 billion in the 16 weeks to January 6. Like-for-like sales grew by 2.1 per cent, driven by higher average selling prices.
However, Tonge admitted that volumes were down compared with the same period last year due to strong comparative numbers and consumer “fragility”. Barclays estimates the like-for-like growth was split by a 4 per cent increase in pricing and a 2 per cent decline in volumes.
Tonge said he did not expect any prices to be reduced at Primark in this financial year, even as cost pressures ease.
Shore Capital, the broker, reiterated its “buy” rating for the company. “We see ABF as a firm in good hands, with sound principles, benefiting in the normalised base rate environment in more ways than one,” it said. “The group sustains a strong balance sheet proving scope to sustain income and buyback activity as well as optionality over inorganic moves.”
Shares in Associated British Foods rose 17p, or 0.57 per cent, to £22.85.