How has Covid affected firms’ costs and prices?

The purpose of Bank Overground is to share our internal analysis. Each bite-sized post summarises a piece of analysis that supported a policy or operational decision.
Published on 07 April 2021
Survey evidence suggests that unit costs have risen over 2020, as firms’ input costs have fallen by less than sales volumes. This may have put some upward pressure on prices, partly offsetting the downward impact of lower demand.

Firms’ unit costs – the cost of producing a unit of output – are an important determinant of firms’ pricing decisions, and so provide useful information about inflationary pressures in the economy. Covid-related factors, such as the Coronavirus Job Retention Scheme, have added volatility to wage and productivity data. This means some measures of unit costs, such as unit labour costs, are difficult to interpret at present.

Results from our recent Agents’ survey on pay and costs can shed some light on what has happened to unit costs since the onset of the pandemic. Our survey suggests that while firms’ sales fell by around 6% over 2020, the fall in firms’ total input costs was much smaller – at around one fifth of that (Chart A). That probably reflects the role of fixed costs, such as rent and loan repayments, which remain largely unchanged even as sales and production fall. As a result, implied unit costs increased by around 5%. Such a rise in unit costs is consistent with evidence from our Decision Maker Panel (DMP) Survey, which suggests that unit costs have increased by around 6% as a result of Covid over a similar period.

A rise in firms’ unit costs may have affected their pricing decisions. Analysis using the DMP Survey data suggests that higher unit costs have exerted upward pressure on prices, as companies are likely to seek to pass through higher cost pressures where they can to maintain profits. In aggregate, however, that has been outweighed by the impact of lower demand, which tends to exert downward pressure on prices as companies lower prices to encourage purchases of their goods and services (Chart B).

Upward pressure from unit costs has been most notable among firms that had less cash on their balance sheets before the pandemic. These firms may have been less able to absorb rises in average costs of production, and so may be more likely to have increased their prices.

The impact of higher unit costs has been larger for goods producers than services firms (Chart B). This may help to explain the relative strength in goods Consumer Prices Index (CPI) inflation over 2020. Excluding the estimated impact of changes in VAT, core goods CPI inflation increased by 0.8 percentage points between February and December 2020, compared to a 0.6 percentage point fall in core services CPI inflation over the same period.


This post was prepared with the help of Phil Bunn, Lai Wah Co and Nicola Shadbolt.

This analysis was presented to the Monetary Policy Committee in February 2021.

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