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1 minute read
Recently, the Bank of England reported an inflation rate of 2.7% in the UK, predicting it will reach 3% next year. If we look at UK's inflation history, this is quite high, and firms are now eyeing an opportunity to hide their price increases behind this inflation.
The beverage manufacturer C&C group announced a 3.5% price increase, which was followed by competing firm Diageo. Analysts expect that Heineken and AB InBev will follow soon, utilizing the blurriness caused by the inflation.
By blurriness, we mean that the fact that consumers are expecting nominal price changes (i.e. prices rise along with inflation), which makes it much harder to see who are making real price increases, i.e. increasing the inflation-adjusted price.
Of course, most consumers do not go around thinking about inflation all day, and so, they do not automatically attribute a price increase to inflation. They also may stop purchasing products due to price increases, but that would happen with a nominal price increase, too, even if real prices do not increase.
As input cost will go up under inflation, most firms find they should increase prices, and so, the nominal price increase is often inevitable -- some firms even use inflation explicitly to justify price increases. Note, justifying price increases with inflation does not mean you cannot increase real prices, too.
If you see declining profitability a price increase is the way to go -- and in such times, you may as well make a "real price increase" too.
