60% of retailers and manufacturers intend to raise prices above the 2.5% VAT rate increase due on January 4 but KPMG warns of the danger of large-scale increases.
The findings are published in a forthcoming KPMG report, Paying the Price for Recession, which also revealed that 40% of UK business also plan to adapt their pricing strategy in a similar way. The KPMG warns against knee-jerk price increases and urges firms to consider the impact on the consumer mindset.

KPMG Performance & Technology partner Martin Scott said: "The economic downturn placed pressure on UK businesses to blanket discount, and the intention to raise prices is an understandable reaction.

"But, the timing must be right. In today's price-sensitive market, any increases may well have a damaging effect on sales volumes. Firms need to understand the overall impact on profitability."

With so many manufacturers and retail businesses forced to discount prices across the board during the recession, many now seem to be looking to use the VAT increase to mask price increases in the New Year

However, Mr Scott explained: "Downturn discounting has re-set the price baseline for consumers, who are now unwilling to pay more for goods and services. Companies need to be wary of first mover disadvantage."

He believes large-scale price increases could risk damaging consumer confidence and economic recovery by causing an "unexpected inflation spike on the high street at a time of fragile market conditions".

According to KPMG, the research also found that almost two thirds of business leaders admitted that recession discounts were implemented without a full understanding of the impact on demand. In addition, 64% of firms face a significant challenge to obtain accurate data on the impact of price on their sales performance.

Mr Scott concludes: "Given that the majority of companies recognise that it will be a challenge to increase prices from discount levels set during recession, it is critical that firms understand the impact of price rises on their markets, before making sudden changes to pricing structures to coincide with the VAT increase."