Bulletin: Food inflation is falling, the risks aren't

Food inflation eases but risks remain 

Food and drink inflation slowed from 1.7% in June to 1.3% in July, according to the CPI measure, marking the lowest rate for two years. The continued easing in food inflation is helping to reduce pressure on consumers, particularly as overall inflation increased from 2.6% to 2.9%, driven by higher utility costs and changes to the energy price cap. 

Food inflation has now remained below overall inflation for several months. This is despite a range of cost and supply-side pressures that would normally be expected to place upward pressure on food prices.  

However, businesses continue to face a range of challenges, including weather-related disruption affecting parts of the agricultural sector. As drought conditions persist across parts of the UK and Europe, attention is increasingly turning to the potential impact on crop yields, availability, and production costs later in the year. 

Read our latest article, Food inflation is falling. Why?

IGD opinion 

The recent easing in food inflation is encouraging for consumers and businesses alike. Lower inflation provides some welcome relief after several years of elevated food price increases. 

However, lower inflation does not necessarily mean underlying pressures have disappeared. Drought conditions across parts of the UK and Europe are increasing risks to agricultural production, while wider cost pressures remain across the food supply chain. Businesses should look beyond today's headline figures and continue to monitor emerging risks that could influence food prices and availability in the months ahead. 

Businesses remain cautious on hiring 

Hiring demand continues to weaken across the UK economy. UK job vacancies have fallen to a five-year low, suggesting low confidence and low demand for UK businesses in a generally weak economy. New data from ONS shows that there were around 707,000 unfilled job vacancies in the UK over May-July 2026.  

This is the lowest level for five years, although it represents a slow fall in the number of vacancies over the course of 2026, rather than a sudden collapse in recruitment. 

IGD opinion 

The slowdown in hiring appears to be concentrated amongst smaller businesses, while larger businesses continue to recruit. This may reflect structural barriers to recruitment affecting smaller businesses especially.  

Legal changes affecting employers (e.g.: increases in the National Living Wage, strengthened rights for employees) may be making it harder or riskier for small businesses to recruit. 

This may be a particular issue for young adults attempting to access work - a point made by Alan Milburn in his interim report on young adults in the labour market. In Chapter Three, he notes that, for a range of reasons, it has become harder for young adults to access their first job. 

This issue connects to the ongoing challenges that food businesses face in recruiting and retaining workers. Lack of awareness of the food system and of the opportunities available is a barrier.  

IGD's Feeding Britain's Future programme, relaunched this year, aims to bring food businesses together with young adults to break down those barriers and to make it easier for young people to move into work. 

Household spending power remains under pressure 

Workers' earnings continue to rise faster than inflation, but the margin is narrowing as inflationary pressures begin to build again, 

Latest Labour Market Overview from ONS shows unemployment remained stable at 4.9% over April to June 2026 and there is little evidence of a significant deterioration in employment conditions. 

Pay also continued to rise, with average nominal weekly earnings growth up around 3.5%, exceeding the rate of inflation. This means that the average worker is still becoming better-off in "real terms", although the gap between earnings growth and inflation is getting thinner.  

However, the number of payrolled employees in the UK actually fell slightly over the last year and the number of unfilled vacancies is also trending slightly downwards, reflecting generally sluggish economic performance. 

IGD opinion 

For shopper-facing businesses, the key question is whether earnings continue to outpace inflation. At present, workers are still seeing real pay growth, but the gap has narrowed significantly. If inflation strengthens in the second half of the year, some households could see spending power come under renewed pressure. 

Government steps up drought support 

With drought conditions affecting much of England, the government has announced special funding to help farmers manage water shortages and build longer-term resilience. £15m is now available for water storage and irrigation projects. 

A further £50m will be provided to the Sustainable Farming Initiative (SFI), taking the total budget to £290m in 2026 and the terms of SFI projects will be made more flexible, which may help more farmers to access support. 

Farmers will be allowed to use land currently reserved for wildlife projects and nature restoration as a source of forage for domestic animals, provided that soil is not damaged. Regulations and limits around water abstraction by farmers remain in place. 

IGD opinion 

With most of England now in drought condition, lack of grass is a major concern for livestock farmers, with some already making use of winter reserves of hay and silage. 

Looking ahead, many will be forced to bring in supplies from further afield. There is a risk of a "hungry gap" between exhaustion of current fodder stocks and the appearance of fresh grass in Spring 2027.  

Extra funding to build water storage is sensible, helping farmers to develop resilience against climate change, but this will be a long-term project and will not create much benefit in 2026.  

Farmers generally do not need planning permission for small reservoirs (under 5 hectares) and can develop these under Agricultural Permitted Development Rights, although other restrictions still apply. 

Climate change and water shortages are key risks to UK food system resilience as explored in our latest free report on the subject Thriving In A Volatile World. 

Energy and shipping risks remain elevated 

Geopolitical tensions in the Middle East continue to create risks for energy markets and global trade routes. A temporary agreement between the US and Iran expired on 16 August and there is currently no sign of a longer-term settlement. Continued disruption to shipping through the Strait of Hormuz remains a concern for businesses reliant on stable energy and commodity markets.

IGD opinion 

The key concern for food businesses is not the expiry of the agreement itself, but the continued impact on energy markets. Higher oil and gas prices risk increasing costs across the food supply chain, particularly for energy-intensive activities such as fertiliser production. 

Shipping in the area has been at a near standstill since mid-July. Expiry of the MoU may therefore have little real diplomatic effect. The economic effect of ongoing closure of the Strait is very real, however, especially when combined with the impact of El Nino. 

Global oil prices have risen from $73 per barrel on 08 Jul (when President Trump first stated that the deal had failed) to $83 per barrel at time of writing. Gas prices have also risen strongly over the same period, especially in the UK. 

This suggests that inflationary impacts of the conflict will persist and may strengthen. Gas is a key component of fertiliser and prices will be a concern for UK food businesses. 

Unless gas prices return to normal soon, farmers may find themselves facing high fertiliser prices as they make their orders for the Spring 2027 season.