Next’s chief executive has warned the UK could be heading for a second cost of living crisis next year as the slump in the value of the pound drives further price rises.
On Thursday the fashion and homewares retailer cut sales and profit expectations for the year after a disappointing August, and because of fears that additionalinflation would squeeze shoppers’ spare cash.
Simon Wolfson, the chief executive of Next and a Tory peer, said the run on the pound that followed Kwasi Kwarteng’s mini-budget last week would hurt businesses relying on imports.
“The devaluation of the pound looks set to prolong inflation, even once factory gate prices ease,” he said. “It looks like we may be set to have two cost of living crises: this year, a supply side-led squeeze; next year, a currency-led price hike as devaluation takes effect.”
Wolfson said businesses were only just recovering from this year’s supply chain constraints, with the factory gate price of goods stabilising and in some cases coming down while freight costs were also beginning to ease.
But he said inflation could be worse in the second half of next year than it was now because many clothing and homeware factories price their goods in dollars, and sterling’s value against the US currency has crashed to historic lows.
In a wide-ranging review of the Truss government’s economic plans, Wolfson called for alternative measures including “radical overhaul of our planning system, the intelligent relaxation of controls on economic migration, energy market reforms and the liberalisation of trade tariffs”. He went on: “It is only measures which increase the supply of goods, energy, services and skills that will cure the underlying malaise.”
The retailer, who holds strong views on the national finances and sponsors an annual economics prize, said the government needed to be “quick and brave” in stimulating change and encouraged the politicians to ditch spending on expensive projects such as the HS2 rail scheme, which he said brought “little value” but increased government debt and used up resources.
He said the tax breaks that Kwarteng announced in the hope of stimulating spending, including cuts to the top and bottom rates of income tax, could have a big impact at Christmas, but added: “I am not particularly excited by that, as the bigger it is, the bigger the hangover afterwards.”
Wolfson said the pound would need to recover by December or January in order to help retailers like Next with purchasing goods and to keep a lid on inflation for autumn 2023. But he said Next might be prepared to keep prices down and take a short-term hit on profits in the second half of next year if there were signs of a sustainable recovery in the pound in the spring.
In the spring and summer of next year, Wolfson said the price of clothing and homewares was likely to increase by about 8%, a similar level of inflation to this autumn and winter, but pressure was building on even bigger rises next winter.
The retailer now expects annual sales to fall by 1.5%, rather than rise by 1%, and on Thursday slashed £20m from its profit forecast to £840m. Next shares dropped more than 12% on Thursday, making the company the second biggest faller on the FTSE 100.
Next said the August slowdown could be down to waning consumer confidence as rising energy and other costs dampened discretionary spending. Shoppers spent less on big ticket items, such as furniture, but also on summer dresses, despite a hot spell. However, the company added the slowdownwas also likely to have been influenced by more people taking holidays abroad and other factors.
Sales for the second half of the group’s financial year are expected to fall by 2% after rising by 12.3% to almost £2.4bn in the first six months, helped by a 63% rise in high street sales after last year’s lockdowns. Pre-tax profits in the first half rose 15.5% to £400m, as a swing back into the black by the high street stores offset a fall in sales and profits at the group’s online business.