(Bloomberg) -- Prime Minister Rishi Sunak has rarely missed a chance to take credit for bringing UK inflation down to 3.2%. But his own policies are set to make it harder for the Bank of England to get price increases down to the government’s 2% target and keep them there.

The hospitality sector — pubs, restaurants, hotels and theaters, together with food and beverages — now accounts for about 2.5 percentage points, or about 80%, of the annual rate of inflation, according to data from the Office for National Statistics. That’s more than double the share of just two years ago. 

Those also are the sectors that have been hit hardest by a suite of government policies, including minimum wage increases, higher alcohol taxes and a 50% increase on the pay required for employees who receive work visas. Fewer work visas further limits the flow of workers into the labor market, keeping upward pressure on wages.

BOE officials are starting to sound more cautious about easing interest rates from their 16-year high, warning that a tight labor market is fueling wage growth and services inflation. That’s a sign that the fight against inflation will hit hospitality firms hardest, pushing more bars and restaurants to the brink of insolvency. It’s the opposite of the “feel-good” factor desired by the Conservative government ahead of a general election expected later this year.

“Times are tough at the moment,” said Adam Quayle, joint artistic director at Box of Tricks, a touring theatre company based in Manchester. “We’ve really been hit by the aftermath of the pandemic, by Brexit, by the cost of living crisis. All of these factors have made the industry really difficult to navigate.”

The trend means that BOE officials weighing when to cut interest rates will focus more sharply on the pace of price increases that services firms — especially hospitality — are managing to achieve. Officials led by Governor Andrew Bailey are expected to keep the key rate at a 16-year high on May 9, but they’ve signaled cuts are possible once inflation is firmly subdued.

But hospitality firms will have a hard time curbing their prices. Bars, restaurants and entertainment businesses are passing on higher costs for food and especially wages. They’re having to pay more because so many people dropped out of the labor market since the pandemic. 

Part of this is due to decisions Sunak’s government has made, most especially excise duties. Chancellor of the Exchequer Jeremy Hunt hiked duty rates on all UK alcoholic products in line with the Retail Price Index at the end of summer. 

That led to a spike in spirits, wine and beer prices, with alcohol and tobacco posting their largest contribution to the annual rate of CPIH inflation on record in August. Hunt ended up freezing the duty in the Spring budget, admitting it was slowing down the BOE’s fight against inflation.

The biggest upward force on prices comes from wages, which are rising rapidly because of an increase in the minimum wage and decrease in the number of available workers. 

Pay growth in the hospitality sector is running at about 8% — higher than the national average — according to PAYE data analyzed by Capital Economics. Firms are competing over a shrinking talent pool after Britain’s departure from the European Union cut the flow of workers. 

Britain’s own inactivity rate — the count of people out of work and not looking — also has risen for a number of reasons. Young people opted to stay in education, while older ones decided to retire early. Covid left the workforce sicker and more interested in hybrid jobs that can be done at home part of the time, making hospitality less attractive.

“The recent stickiness of wage growth in these sectors is a bit worrying and could mean that wage growth, and therefore CPI services inflation, falls slowly,” said Paul Dales, chief UK economist at Capital Economics.

It’s about to get worse after government delivered a 9.8% rise in the National Minimum Wage to £11.44 an hour, which came into force in April. The increase, which is not yet reflected in official wage data, will disproportionately hit leisure and hospitality payrolls as they employ many staff on low wages. 

Sunak and Hunt say fighting inflation is a priority. They’ve mostly left reining in prices to the BOE, which jacked up interest rates.

“Our priority for the last year has been to tackle inflation with higher interest rates,” Hunt said earlier this month. 

Consumers still feeling the pinch from the cost-of-living squeeze and remain sensitive to price increases, limiting the ability of bars and restaurants to jack up their prices. But even if the Bank of England starts cutting interest rates, borrowing costs will remain well above levels prevailing in the last decade.

“Margins are pretty thin, but if they pass that on to consumers, they’re going to put them off because the perception is that it’s already too expensive,” said Julie Palmer, partner at bankruptcy specialist Begbies Traynor. “But what else can they do to absorb that higher cost base apart from passing it it on?”

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