Food inflation may return soon
20 November 2024Understand the latest on food inflation and the impact of the change in the Ofgem domestic energy price cap.
New inflation data from the ONS, covering October 2024 shows that “all items” inflation, using the CPI method, moved upwards from 1.7% in September to 2.3% in October. This is an abrupt movement accounted for primarily by a change in the Ofgem domestic energy price cap.
The cap was increased by 10% in October and a further increase is expected in January. This will increase pressure on household finances, especially if winter is severe.
2024-25 is likely to be a “La Nina” year, so there is a high risk of colder-than-average weather. Older households could be hit hardest, because many have lost their special winter fuel payments.
Energy prices in October were still lower in October 2024 than in October 2023, but they are now making a much smaller negative contribution to inflation than they were in September, as shown in the accompanying chart. Services continue to account for the bulk of inflation pressure.
In the food and drink market, CPI inflation held steady at 1.9%, which is within IGD’s summer inflation forecast, but towards the top end. Most inflation pressure was exerted by fruit, vegetables, soft drinks and sugary items.
IGD Viewpoint
The cost of producing and distributing food in the UK remains high but fairly stable. Defra and ONS data provide no evidence that cost pressure for businesses is easing or that margins are expanding.
Looking ahead, it is likely that business costs in the food and drink supply chain – and in other activities – will rise further.
This is primarily a consequence of government policy rather than “market” effects. UK food businesses must deal with a range of policy changes (e.g. EPR and border changes), primarily:
The increase in the National Living Wage (NLW) by 7% from April 2025
The increases in the rate of employer NI contributions
The lowering of the threshold for payment of NI
The impact will be greatest in lower-paid roles, but there is likely to be a wider impact since better-paid workers will expect their own wages to rise at a similar rate to the NLW.
Food and drink businesses may be especially exposed if they have large workforces or many workers on lower wages and part-time contracts.
Yet further increases in employment costs may come from the Employment Rights Bill if it is passed into law. The official economic impact assessment for this bill suggests a cost to employers of around £150 per person per year.
With business costs likely to rise and little margin available to absorb this, it is likely that at least some cost increases will need to be passed to consumers – although not necessarily immediately.
IGD plans to issue a new food inflation forecast in December 2024.