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 re-coup increased costs, which the government controls through its taxation policies set at national and local 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.
An increase in 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 altogether 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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