Budget and food inflation: A leaner Christmas ahead?

The 2025 Budget has sparked debate about its impact on household spending, particularly on food. IGD’s latest Viewpoint report: Food inflation to persist as taxes bite suggests the Budget will influence retail food price inflation, but its effect is modest compared to other forces.

Approximately 30–40% of retail food inflation in 2026 will be driven by government policy decisions, a slightly higher contribution than in 2025.

Most Budget measures were already factored into IGD’s inflation outlook, meaning only minor adjustments were needed. But the bigger picture? Food inflation remains stubbornly high.

IGD forecasts retail food inflation to decline slowly from an average of 4.3% in 2025 to 3.8% in 2026 and 3.3% in 2027. However, this is up from our previous summer forecast of 2.1% in 2026 and 1.8% in the first half of 2027.

This signals that retail food inflation will remain persistent well into 2026. Relief is expected to be gradual rather than immediate, leaving retailers and consumers navigating a prolonged period of elevated prices.

What’s driving higher food inflation?

Inflation in food retail is shaped by two main forces: government policy and market dynamics.

The key Budget measures impacted retail food inflation include the National Living Wage and Business Rates. The impact of business rate changes will be much greater in Away From Home and accommodation than in retail.

The most significant policy impacts come from measures outside the Budget, including Extended Producer Responsibility and the Deposit Return Scheme.

The bulk of retail food inflation will come from market forces, not Government policy. These include costs for energy, raw materials, imports and anything impacted by supply and demand.

Impact on food shopping and eating out at Christmas

Increased taxation is the main factor dampening demand, rather than just relatively high background inflation. This is set to put additional pressure on consumer spending on food, both in-home and away from home.

Fresh IGD research conducted immediately after the Budget reveals a cautious consumer outlook:

• 50% of shoppers expect to be worse off financially in the next year due to Budget measures, rising to 64% among over 65s vs 29% of 18-24s.

• Only 11% expect to be better off.

• 36% plan to buy less food and groceries over the next 12 months due to Budget measures. Only 9% expect to buy more.

Christmas may be impacted as well due to the Budget measures:

• 37% expect to buy less food this Christmas due to the Budget measures. Only 11% expect to buy more.

• However, the picture is bleaker for eating out:

  • 49% expect to visit cafes, restaurants, or pubs less often in the next year due to the Budget measures. Only 9% expect to visit more.

  • 46% plan fewer outings this Christmas. Only 8% expect to visit more

What does this mean for the food industry?

Retailers must focus on value and affordability through promotions and pack-size optimisation. The away-from-home sector faces tougher challenges with rising costs and reduced footfall.

Conclusion: a festive season under strain

The 2025 Budget won’t single-handedly drive food inflation, but combined with existing policies and market forces, it ensures prices remain elevated. Consumers are bracing for a leaner year, with discretionary spending, especially eating out, under pressure. For retailers and foodservice operators, agility and a sharp focus on value will be key to navigating this challenging landscape.