Bulletin: New inflation forecast, higher borrowing, lower confidence

Higher food inflation

Businesses and consumers are looking ahead, pondering what 2025 might bring. IGD estimates that food and drink retail inflation over 2025 will average 2.4 to 4.9% although, as always, “wild card” events could affect this.

Read our latest article from our Chief Economist, James Walton, on the outlook for food inflation, key drivers and impacts for the food system.

Higher borrowing

UK government borrowing costs are rising, quite rapidly. This week, the Debt Management Office (DMO) auctioned a £2.25bn tranche of 30-year bonds, known as gilts.

The average price achieved implies a real-terms yield of 5.2% (yield is, effectively, the interest rate for long-term government borrowing). This is the highest yield for 30-year bonds since 1998. Yields have risen steadily since Spring 2020, when the rate stood at a low of 0.6%.

IGD opinion

Government bonds are normally seen as a fairly safe investment, since they are backed, in effect, by an entire nation.

Rising bond yields, especially for short-term bonds, suggest that investors are losing confidence in the ability of a nation to pay off its debts and demand higher returns to reflect higher risk.

The UK government’s credit rating remains stable for the moment, however.

The government is expected to spend about £106bn on debt interest in 2025-26 (source: Table 5.13, Economic & Fiscal Outlook, OBR, October 2024).

Even small changes in yields can have significant impacts on government finances.

Bond buyers are therefore key stakeholders for the Chancellor. Ultimately, they decide the terms on which the government borrows, so they need reassurance.

If the cost of servicing new and old debt continues to rise the Chancellor may have to adjust fiscal policy, either spending less of levying higher taxes.

Rising bond yields may also have impacts on non-financial businesses and consumers.

Higher bond yields may attract investors with a willingness to take on risk, meaning that fewer funds are available for lending elsewhere in the economy.

If this happens on a large scale, then retail interest rates would be expected to rise, but the market data available from the Bank of England does not show this for the moment.

Low business confidence

Business confidence has fallen to its lowest level since the aftermath of the mini-budget in 2022. Business confidence has declined since the Autumn budget. There is rising concern about taxation and more businesses are expecting to raise prices. Confidence levels are lowest in the retail and hospitality sectors.

IGD opinion

The dip in business confidence, following the Autumn budget, should come as no surprise. In our recent Viewpoint Special report, Hungry for growth, we reported that measures outlined in the Autumn Budget, particularly concerning National Insurance contributions, have significant implications for businesses in the food system. This resulted in IGD revising upwards our food inflation forecasts.

The report concludes by stating that the UK food system needs greater focus from government in order to support economic growth, build resilience, meet national net zero commitments and accelerate the transition to healthier and more sustainable diets.

New deal for farmers

Defra secretary of state, Steve Reed, has announced a “new deal for farmers”. As part of the Plan for Change, Mr. Reed announced measures on:

• Monitoring the origin of food procured in the public sector

• Backing farmers to grow their production through a consultation on planning reforms

• Supporting farmers to diversify income through renewable energy and further opportunities

• Promising to uphold high environmental and animal welfare standards in future trade deals

• Supporting profitability through new rules for pigs, eggs and fresh produce ensuring contractual fairness

The Secretary of State also re-committed to the Government food strategy, Farming roadmap and Land-use Framework.

Food waste

The government has announced a £15m fund to help fund a series of minimum £20,000 grants to help get food, that might otherwise go to waste, to homeless shelters, food banks and charities.