Bulletin: Industrial Strategy, inflation, wages

Inflation vs food inflation

The latest data from ONS shows that all items inflation has declined to 1.7% in September, down from 2.2% in August, when measured by the CPI method. This is the lowest rate in three and half years. Inflation is now below the Bank of England target of 2%.

However, retail food and drink inflation increased from 1.3% in August to 1.9% in September, the first increase since March 2023.

Inflation in food and drink continues to surprise on the upside – IGD’s food inflation forecast from summer 2024 suggested that rates would be below 1% at this point.

See our latest inflation article.

IGD opinion

It is not immediately clear why food and drink inflation is proving so persistent in the UK, especially in view of efforts made by retailers and suppliers to contain – and, ideally, reverse – it.

One factor may be labour costs.

In 2024, cost-to-employ has continued to rise across the whole UK economy, especially in “entry-level” roles, where workers benefited from another steep increase in the National Living Wage (NLW) in April.

This naturally impacts businesses at every stage in the food and drink supply chain.

Material costs may also be playing a role.

For UK food commodities, the picture is quite mixed: although some items (e.g. potatoes and milk) have seen price rises this year, others have seen modest price cuts (e.g. poultry, pork).

Internationally, food commodity prices have risen over 2024, although they are well below the 2022 peak.

Looking ahead, it is possible to identify various factors that will influence the future direction of pricing.

Cost-to-employ remains the key issue – the Budget of 30 October will hopefully give some clarity over government policy on developing the NLW.

Other labour market measures may also push up employment costs.

In 2025, some policy measures will take effect which will also increase operating costs for businesses, especially the ongoing rollout of Extended Producer Responsibility (EPR) and new border rules.

Wage growth slows

The ONS has reported that pay growth continues to slow. It is now rising at its slowest rate in two years. The average UK wage increased by 3.8% year-on-year (seasonally adjusted, including bonuses) for June-August 2024. Wage growth in real terms, taking account of declining inflation, was 1.9% for regular pay compared to 2.2% for the previous three-month period.

IGD opinion

Slowing wage growth combined with subdued economic growth and lower inflation will make it more likely that the Bank of England Monetary Policy Committee will consider reducing interest rates again this year.

Unemployment and vacancies

The latest data from the ONS shows unemployment at 4.0% for June to August 2024.  Vacancies decreased for the 27th consecutive period to 841,000 (a decline of 3.8% on the previous quarter). The total estimated number of vacancies remains 45,000 (5.7%) above its January to March 2020 pre-coronavirus (COVID-19) pandemic level.

Industrial Strategy update

The government has published a green paper, Invest 2035: The UK’s Modern Industrial Strategy to deliver long-term growth. Details include:

• Appointing Clare Barclay, CEO of Microsoft UK, as Chair of the new Industrial Strategy Advisory Council. The Council will ensure that policy change has long termism built in from the start

• The focus will be on the UK’s existing strengths i.e. highly productive industries. Eight growth driving sectors for Industrial Strategy have been recognised - advanced manufacturing; clean energy industries, creative industries; defence; digital and technologies; financial services; life sciences; and professional and business services

• A consultation will allow businesses to have an opportunity to inform the Strategy’s continued development. The consultation closes 24 November 2024. The final Industrial Strategy will be published in spring 2025

• A new supply chains taskforce to assess where supply chains critical to the UK’s economic security and resilience could be vulnerable to disruption

IGD opinion

The new plan seems sensible in itself: evidence-led, with a collaborative design and focusing on existing strengths.

The challenge will be to ensure the plans achieve traction. Previous plans for investment have been impacted from shocks such as Covid and the cost-of-living crisis.

A more stable strategic environment may allow more rapid progress to be made this time around.

However, in chasing international money – which the government explicitly will – the UK will be in competition with other markets.

To win over international investors, the UK will have to be not only a good investment destination, but the best destination.

While it is frustrating that the agri-food supply chain is not mentioned as one of the key sectors identified by the new government, this should not come as a shock.  The government has based the choice on productivity performance data and it is clear that agri-food does not score highly by the specified criteria.

However, agri-food does have status as a vital strategic activity - it is critical to a thriving UK. With a presence in every community across the country, the food system is central to every one of our local economies. It is also the largest private sector employer, providing 1 in 8 jobs. See this infographic for more details on the value of the UK food industry.

UPF research

New research has advised that until the link between ultra-processed foods (UPFs) and poor health is better understood, the focus of official public advice should remain on avoiding known threats: high fat, sugar and salt content. See our consumer research on UPFs.