Bulletin: Higher food inflation, interest rates, pay growth

Higher food inflation

Latest IGD food inflation forecasts predict that inflation in 2025 will be 2.4% to 4.9%, with the most likely outcome being 3.4%. The rising cost of living, combined with increased employment and regulatory costs, will keep inflation elevated.

See food inflation forecasts here.

Latest inflation

New inflation data, covering November 2024, is now available from ONS. “All items” inflation was 2.6% year-on-year, up from 2.3% in November, as measured by the CPI method. The slight up-tick in inflation was driven primarily by higher motor fuel costs, and higher prices for recreational goods and services such as event tickets and computer games. Food and drink inflation strengthened slightly, moving from 1.9% in October to 2.0% in November.

IGD opinion

Demand in the UK economy is fairly weak, but inflation pressures are still in effect, and they will likely remain in-place in 2025.

In the food and drink system, new and higher labour costs as a result of policy changes are a key concern. IGD anticipates that the majority of these new costs will need to be passed on to shoppers. Cost changes due to new border procedures and Extended Producer Responsibility (EPR) will also need to be accommodated.

IGD has issued new food and drink inflation forecasts, suggesting that inflation in 2025 will be 2.4% to 4.9%, with the most likely outcome being 3.4%

Interest rates

The Bank of England Monetary Policy Committee (MPC) has decided to hold interest rates at 4.75%. The MPC had cut rates from 5% to 4.75% in November, just the second reduction in 2024.

IGD opinion

With inflation creeping up and higher wage growth, the MPC is likely to be cautious in delivering further base interest rate cuts. However, this comes at a time when GDP declined in October by 0.1%, after a decline of 0.1% in September. Higher interest rates work by reducing demand for goods and services in the economy. While helping to slow the rate of inflation, they also hamper economic growth. This is a tough balancing act for the Bank of England. The Bank of England has said that “If inflation remains close to target, we expect to reduce interest rates further.”

Pay growth

ONS has released new data on the state of the UK labour market, with information up to October 2024.

Average weekly pay in October was up 6.3% (including bonuses but excluding arrears). “All-items” inflation in October was 2.3% year-on-year by the CPI method, so pay was up around 4.0% in “real terms”, helping to support the spending power of workers. Pay growth was faster in the private sector than in the public sector.

Compared with the situation pre-Covid, UK inactivity and unemployment rates are both up, but vacancy numbers are also up. This may indicate a mismatch between the skills in the labour pool and the skills needed by employers.

IGD opinion

The UK economy is in a fairly weak state, but pay growth remains surprisingly strong - this may reflect a lack of workers and skills. However, changes planned for 2025 may cause pay growth to slow down.

Increases in the National Living Wage (NLW) and changes to National Insurance (NI) will make it more expensive to hire workers, especially in lower-paid and part-time roles. Food and drink businesses may be especially exposed.

Employers in many fields – including food and drink – are expected to respond to these changes. A range of options are available, including reducing pay for non-NLW workers (the majority of workers), reducing recruitment, spending less on training and adjusting benefits such as health insurance.

In the food and drink industry, it is likely that a large element of higher labour costs will have to be passed on to shoppers. IGD’s latest food inflation forecasts take account of this, with high labour costs delivering a strong inflation “pulse” in 2025.

Data from the Bank of England Decision Maker Panel shows that employer expectations for pay and employment growth have fallen steadily over 2023 and 2024, with a sharper reduction in November 2024, perhaps in response to the Budget the previous month. OBR also anticipates that pay growth will slow down in 2025 and 2026.

Season’s greetings

That is all the Economic Bulletin news for 2024. We look forward to bringing you all the latest economic, public policy and consumer news in 2025.