British business community warns that the new budget may further stimulate inflation, forcing the central bank to slow down the pace of interest rate cuts.

Stubborn inflation has become one of the biggest drawbacks of UK Chancellor Rachel Reeves' first budget. And in the second budget, she might be heading down the same path. In recent days, British business groups have warned that the Labour government's policies on taxation, employment rights, and minimum wage could bring tens of billions of pounds in operating costs to businesses and drive prices up further in the coming year. They say that this time, the impact could be sharper as businesses have less profit margin and find it harder to absorb the pressure without passing on costs. Steve Partridge, spokesperson for the British Chambers of Commerce, said: "Our top ask in this budget is: do not increase taxes on businesses anymore." "The only way to absorb these costs is through price hikes." Due to constraints from Labour Prime Minister Keir Starmer's election promise not to harm the "working people" (i.e. not raise income tax or value-added tax), Reeves chose to balance the budget in her first budget in October last year by increasing employer wage contributions by 26 billion (USD 35 billion) and significantly raising the minimum wage, which is the core of the Labour Party's first fiscal plan in 14 years. Nearly a year later, it is widely believed that these policies have pushed up inflation. The Bank of England has also joined the Office for Budget Responsibility (OBR) in expressing concerns. When Reeves announced the fiscal plan last year, the Consumer Price Index (CPI) was hovering near the government's 2% target. In July this year, the index rose to 3.8%, and some Bank of England monetary policy makers now advocate slowing down the rate cut to curb prices. British businesses fear that after Reeves unveils her second budget on November 26, they may face a new round of regulatory burdens and tax hikes. According to estimates, the UK government will face a 35 billion fiscal shortfall, including rising borrowing costs, the welfare cut overturned by Starmer in July, and the OBR's upcoming downgrade of economic growth expectations. Although Reeves has not publicly admitted that her policies have pushed up inflation, she and her aides have privately begun to warn that rising prices could slow down the pace of interest rate cuts, lower living standards, and trigger industrial unrest. London Underground drivers are currently on a week-long strike, saying that their 3.4% pay raise is below the current inflation rate. The Bank of England predicts that inflation will peak at 4% in September and then gradually decline. At a cabinet meeting on Tuesday, Reeves told ministers that they must work together to prevent a new buildup of inflation before the November budget. She said: "The government must further support the Bank of England in lowering inflation, controlling public spending, and promoting economic growth." Meanwhile, Starmer is also seeking to strengthen his control over economic policy and maintain relations with businesses. He has established a new "budget committee" with key figures from 10 Downing Street and the Treasury. According to insiders, the group will be co-chaired by economic adviser Minouche Shafik and Treasury minister Torsten Bell and include key advisers from Downing Street. However, retail and business groups say that government policies could worsen the situation, re-enacting last year when most of the rise in employer National Insurance Contributions (NICs) was passed on to consumers by businesses. The OBR estimated last year that the increase in NICs would push the inflation rate up by 0.4 percentage points. Small businesses will also face a 1.7 billion increase in business rates next April when the relief expires. Additionally, new regulations on worker rights, minimum wage, and packaging will bring extra costs to businesses. A survey by the British Retail Consortium (BRC) in April showed that 52% of its members expect the Employment Rights Bill to increase costs. The UK government's own analysis estimates that the cost of the bill could reach up to 5 billion. BRC says that this burden will "fall disproportionately on employers in low-wage sectors such as retail, hospitality, and leisure," which have thin profit margins and little capacity to absorb the impact. Government research shows that if the entire 5 billion cost falls on these low-wage sectors, on top of the planned 4.1% national living wage increase scheduled for next April, there will be an additional 1.5% increase in wage costs. The same study shows that the main response from businesses will be to raise prices. The rise in the national living wage in the UK has already compressed the wage gap between employees, as employers try to spread the cost across the entire workforce. The UK Hospitality industry body pointed out the potential risk of a "wage-price spiral driving inflation" in response to the 4.1% national living wage increase. Pano Christou, CEO of the UK sandwich and coffee chain Pret A Manger Ltd., said on Tuesday that the industry is under "intense" pressure. The Bank of England is increasingly concerned that government policies are undermining its efforts to lower inflation. In its August Monetary Policy Report, the Bank of England pointed out that the recent rise in core goods price inflation mainly reflects higher labor costs and blamed it for causing food price rises in the UK to be steeper than in other parts of Europe. The Bank of England is particularly concerned about food prices, as they are "highly significant for households," meaning they "may affect inflation expectations and exacerbate the sustainability of inflation pressures." The Bank of England also warned in August that the new packaging tax, set to take full effect in the coming months, could lead to a slightly higher than 0.5% increase in food prices. BRC expects the current 4.6% food price inflation to rise to 6% later this year. Since August 2024, the Bank of England's Monetary Policy Committee has been cutting interest rates every three months. However, due to stubborn inflation, investors now expect policymakers not to cut rates again before February next year. High inflation is not only eroding living standards but also increasing government borrowing costs, making it harder for Reeves to achieve fiscal balance. Simon French, Chief Economist at Panmure Liberum, wrote in a report last week that the high borrowing costs of long-dated UK government bonds were partly due to market concerns about persistent inflation. He said: "The Treasury is subtly shifting its language towards reigning in inflation, which is somewhat encouraging."