Companies are unable to bring down prices to former levels as wage pressures increase.
Britain is dealing in “fantasyland economics” in which companies are criticised for raising prices but face pressure to increase staff wages, one of the UK’s biggest retailers has said.
John Roberts, the founder and chief executive of AO World, said it was “fanciful” that retailers would be able to bring prices down to a level they were at two years ago.
AO World employs around 3,600 staff, all of which are “paid more than they were previously”, Mr Roberts said.
He added: “That has got to filter its way through [to prices on the shelves].”
Retailers are facing growing scrutiny over rising food prices with unions accusing supermarkets of “grotesque profiteering”, claims which grocery bosses have denied.
Consumer price inflation, which includes food costs, increased 8.7pc over the year to May, according to the Office for National Statistics (ONS). Grocery prices jumped by 18.3pc.
Mr Roberts said: “There’s a sort of fantasyland economics that goes on in the country that no one is allowed hardship, nothing is allowed to go up [in price], but everybody wants to earn more money.
“The Government spewed billions into Covid relief and that manifests itself in inflation – shock horror.”
He added that when the cost base goes up for retailers “you either pass that on or go bust”.
Andrew Bailey, the Governor of the Bank of England, has said “unsustainable” pay rises are to blame for stoking inflation.
Mr Bailey is under renewed pressure to tame inflation as figures published on Wednesday showed pay is continuing to soar across the services industry – in a further sign that price rises are becoming embedded in the UK economy.
The purchasing managers’ index (PMI), a closely-watched survey from S&P Global, showed mounting salaries are “overwhelmingly” the reason why companies’ costs are rising, with bosses having to pay more to recruit and keep the staff they need.
Meanwhile, a survey by the British Chambers of Commerce, found 45pc of businesses are planning to raise their prices in the three months to June.
More than two thirds of firms cited salaries as putting the most pressure on their costs.
Shevaun Haviland, director general of the BCC, said: “With inflationary pressures weakening, but wage cost concerns remaining high, our research should give the Government and Bank of England pause for thought on their next steps.”
“There is a fine balancing act to be struck here. Push too hard on interest rates and there is a real danger that the long-term outlook for economic growth and prosperity will be dented.”
The Bank has raised its base rate from 0.1pc to 5pc since December 2021, with traders betting on rates rising to 6.25pc early next year.
Sainsbury’s chief executive Simon Roberts this week said food inflation was easing, but labour costs would prevent prices from falling to where they were previously.
He said: “Prices are not going back to where they were because the cost of producing food is clearly elevated from where it was a year or two ago.”