Wednesday, November 22, 2017

Next says National Living wage could drive inflation

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High street giant Next has reported a 7.1% rise in pre-tax profits after sales of full-price goods surpassed even the retailer‘s own predictions.  

The fast fashion retailer, Britain‘s largest by market share, is on the up – a far contrast from Marks & Spencer‘s clothing division. 

The update comes as Next boss Lord Wolfson cautions on the impact of implementing the National Living Wage, set to cost the business £27m a year from 2016 to 2020 in order to reach the £9 level by 2020. This includes £11m to increase the wages of workers paid less than the national living wage at present, and £16m to increase the pay of the rest of the workforce at the same pace. 

Next year’s increase will set the retailer back £2m but in following years, the increases will be much higher, with the total wage bill totalling £147m by 2020.”¯ 

As a result, Next will increase prices across the board by 1%.  

“In summary, as long as the LWP [national living wage] is linked to 60% of the median wage, we believe that the burden is manageable,” Wolfson said. “The resulting price increases are also likely to be affordable in the context of forecast general wage inflation of 4.5% per annum. 

There is an uncertainty as to what will happen in the event that median wage inflation is lower than the forecast 4.5% per annum. In order for the LWP to hit £9 per hour in 2020, inflation in the median wage needs to be 3.5%. If, however, wage inflation runs below 3.5% then achieving £9 in 2020 may be problematic, as it would mean raising the LWP above 60% of the median wage. 

Such a move would mean that maintaining reasonable wage differentials would be likely to move the median level itself, creating a potentially harmful inflationary loop.”