According to UK Consumer Price Index
(CPI) data, the UK's inflation rate reached 3.9% in the 12 months leading up to
November 2023, a decrease of 0.7% from October's rate of 4.6%. UK industrial
price inflation was 2.6%, unchanged from October 2023, verifying suppliers
spent an average of £540.00 for every £1,000.00 spent by the public sector.
Managing Inflationary Cost
Increases
There is a great temptation to believe
that public sector suppliers' costs have increased due to the November 2023 CPI
rate of 3.9%. However, it is important to differentiate that the CPI
rate measures consumer prices, whereas industrial prices are based on supply
costs.
Allowing suppliers to increase their
prices by the rate of CPI will increase costs by £39.00 for every £1,000.00
spent by the public sector, even though a supplier's costs will have increased
by just £15.66, based on the supplier's spend of £540.00 to generate sales of
£1,000.00.
The scenario above shows that UK public
sector suppliers will have increased their prices by an additional £23.34 per
£1,000.00 of public expenditure when supply costs have increased by just
£15.66, artificially increasing costs for the UK taxpayer by 2.334% in November
2023. According to the National Housing Federation, cost inflation for Housing
Associations amounted to 8.9% in September 2023.
In contrast, the UK government
set England’s social housing rent cap at 7% for 2023, leaving Housing
Associations 1.9% worse off in real terms. Price inflation
is a critical issue for the public sector, as the amount that income can
be increased is governed by the public’s ability to pay for
local services, leaving the public sector unable to recoup increased costs,
which the government controls through its taxation policies set at national and
regional levels.
The Impact of Supplier Input and Output
Costs
The United Kingdom has encountered
various economic difficulties recently, notably reflected in the UK Producer
Price Inflation (PPI) rate. This metric is crucial in assessing the price
fluctuations producers receive for their products over time. Examining the
relationship between input and output prices makes it possible to understand
the overall economic environment and its implications.
Input prices encompass the expenses
associated with raw materials, labour, and other essential resources producers
require to manufacture their goods. These costs represent the financial outlay
necessary for product creation. For instance, an electronics manufacturer must
account for the expenses of components such as semiconductors and batteries,
which are vital for assembling their devices.
Increasing the prices of these essential
materials leads to a rise in overall input costs, affecting an organisation's
production expenses. Recent developments, particularly during and after the
COVID-19 pandemic, have resulted in notable volatility in input prices,
primarily due to disruptions in global supply chains.
Such increases often compel
organisations to transfer these elevated costs to consumers, influencing
economic inflation rates. Output prices reflect the amounts producers earn
for their completed goods, a key indicator of what consumers and businesses are
willing to pay in the marketplace.
A notable increase in output prices can
suggest that product demand surpasses supply, which often triggers inflationary
pressures. For example, during 2021 and 2022, various products in the UK,
including food and household essentials, experienced price surges attributed to
supply chain disruptions and heightened demand as economies began to reopen.
The Influences of Supply Cost Dynamics
Besides market dynamics, output price
increases can be influenced by external factors such as policy changes, tax
hikes, or escalating transportation expenses. The interplay between input and
output prices is essential for understanding market behaviour. When the costs
of inputs rise, producers may find it necessary to elevate their output prices
to preserve profit margins, thereby impacting overall market pricing.
Conversely, if input prices stabilise or
decline, producers may opt to reduce their output prices to stay competitive in
the market. In recent years, considerable volatility in input and output prices
has been driven by economic uncertainties stemming from Brexit and the
pandemic. This fluctuation underscores the importance of comprehending the UK’s
PPI index for policymakers and organisations, providing critical insights into
economic trends and pricing strategies.
The UK producer price inflation rate is
an essential economic metric that indicates fluctuations in both input and
output prices. Input prices represent producers' expenses, whereas output
prices denote the revenue generated from selling their products.
By examining these factors, stakeholders
can gain insights into the economic landscape, allowing them to predict future
trends and enhance their decision-making strategies. Grasping these dynamics is
crucial for promoting financial stability and supporting sustainable growth
whilst managing the UK’s CPI and PPI inflation trends.
Controlling Contractual Pricing Clauses
Standard UK public
sector contract and framework agreement pricing clauses allow
suppliers to increase their prices by the CPI rate at each
relevant contract and framework agreement anniversary
date. Suppliers invariably use the highest CPI rate within the previous 12
months to raise their prices, even though the rate may have been lower at the
contract or framework agreement anniversary date.
Amending these contractual pricing
clauses to allow Suppliers to increase their prices by the UK PPI rate
would enable suppliers to increase their costs annually without increasing the
UK’s CPI inflation rate, ultimately allowing the commercial risks of
inflationary price increases to be shared between the public sector and its
supply chain. This applies equally to the private sector, where supply
contracts allow annual CPI cost increases rather than cost increases based
on the UK PPI rate.
Allowing public sector suppliers to
increase prices annually based on the UK CPI inflation rate means that the
commercial risk of increased supply costs lies entirely with the public sector.
This results in the public sector having to lower the quality of public
services or eradicate them if the services cannot be maintained due to the
increased costs.
B3Living’s internal cost inflation rate
was reduced to 2.1% in December 2023, 1.8% lower than the CPI rate
for November 2024 and 6.8% lower than the average
Housing Association, to benefit customers whose services are
provided at reduced costs, at the same, if not higher, levels of service
quality.
B3Living's Framework Agreement
commercial pricing clauses share the commercial risk of supply cost
increases by allowing suppliers to increase their prices only at the second
anniversary date of a four-year Agreement, as the
Agreements contain a two-plus-two-year fixed price arrangement. It should be
noted that B3Livings Framework Agreements stipulate that suppliers must
pay their staff the living wage, as supported by the Living Wage
Foundation.
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