Opinion: Inflation might be Slowing – Costs Aren’t.

Finito World

Inflation has fallen to 3%. The headlines are calm. The Bank of England may even cut interest rates. On paper, the worst appears behind us.

But an item on the BBC caught my eye: tell that to a premium bakery buying chocolate at £20 a kilo.

The trouble with inflation is that it is always reported as an average. A number, neat and abstract. But businesses do not trade in averages. They trade in inputs. And for Gaya Vara of Gaya Bakery in London, the inputs that matter — luxury chocolate and French butter — have surged by 40% and 30% respectively in barely eighteen months.

Food inflation may have cooled. But the base has shifted. Prices have reset higher.

A kilo of chocolate that once cost £12.99 now costs close to £20. Butter has risen from £10 to £14. Eggs, energy, packaging, wages — none have returned to 2021 levels. Inflation slowing does not mean prices falling. It means they are rising less quickly from an already elevated plateau.

For a premium bakery, there are only three choices: compromise on quality, raise prices, or absorb the difference.

Gaya’s answer is clear. “I’m not going to compromise on quality.” That leaves the latter two.

So far, she has absorbed most of the increase.

And that is where the real story lies.

Across the country, thousands of SMEs have done the same. They have quietly protected customers from the full force of post-pandemic and post-Ukraine inflation. Margins have narrowed. Owners have delayed pay rises. Hiring plans have been paused.

Yesterday we learned unemployment has climbed to 5.2%, close to a five-year high. Youth unemployment sits above 16%. Hiring activity is weak. Vacancies are stable, but the number of unemployed per vacancy is rising.

These trends are not separate stories. They are connected.

When input costs rise and consumer demand remains fragile, businesses defend cash flow. Expansion slows. Recruitment becomes cautious. Premium operators — bakeries, restaurants, hospitality venues — are especially exposed. They rely on discretionary spending, and discretionary spending tightens first.

Even as wages are still rising faster than prices on average, the growth rate is slowing. Private sector wage growth has fallen to its lowest rate in five years. Employers are watching costs carefully.

The bakery is a microcosm of the wider economy.

Inflation at 3% sounds manageable. But since 2021, prices overall are up more than 25%. That cumulative effect is what bites. A business does not adjust to one year’s inflation; it absorbs four years’ compounding.

And here is the strategic question: can premium businesses pass costs on?

In theory, yes. Luxury pricing allows margin. In practice, it depends on confidence. If customers feel squeezed, even high-end spending softens. If unemployment edges up and hiring stalls, consumer psychology shifts quickly.

So Gaya absorbs.

But absorption is not infinite. At some point, prices must rise. Or staffing must adjust. Or expansion must pause.

That is how inflation transmits itself into the labour market.

When economists debate whether a 3% inflation print justifies an interest rate cut, they are debating the macro side of this. But the micro is lived in kitchens, shop floors and payroll spreadsheets.

The premium bakery that refuses to compromise on quality is admirable. It is also economically instructive.

Slowing inflation is good news. But until costs normalise — and they are not normalising — small businesses remain in a delicate position. And when small businesses feel delicate, jobs feel delicate too.

The headline says inflation is easing.

The chocolate bill says otherwise.