Bulletin: What is the impact of inflation rising?

Inflation increase

All items inflation edged up in recent weeks, increasing from 2.5% year-on-year in December 2024 to 3.0% in January 2025.

This uptick was partly due to the fading impact of previous downward pressure from household utilities as well as a slight increase in the OFGEM energy price cap.

Food and drink inflation jumped from 2.0% year-on-year in December 2024 to 3.3% in January 2025, with inflation rising in 7 out of 11 food and drink categories.

After reaching a low of 1.3% in August 2024, food and drink inflation has more than doubled in just five months, although starting from a low base.

Food and drink was a major reason for the upturn in overall inflation, being the second largest contributing factor after transport costs.

IGD Opinion

Clearly, food price inflation is starting to make a comeback, as predicted by IGD in the December Viewpoint report.

Looking ahead, further cost increases for food businesses are expected, mainly driven by government activity, such as changes to National Insurance rules and new levies on packaging waste.

As a result, inflation is likely to remain a feature of the market throughout 2025, though it won’t reach the levels seen in 2022-23, which posed a significant challenge for shoppers.

For businesses, the inflationary impact means both volumes and margins will be under pressure – price increases don’t equate to “real” performance improvements.

Pay growth concern

New ONS data shows that pay growth was still strong, rising 6.0% in Q4 2024 (including bonuses), compared to 4.4% in Q3. With CPI at 2.5% in Q4, real earnings growth remained strongly positive.

The labour market data also revealed the following trends for October-December 2024 versus the previous quarter:

• The unemployment rate increased (4.4% vs 4.3%)

• Redundancy levels rose (3.9 per thousand vs 3.2)

• The inactivity rate dropped (21.5% vs 21.6%)

IGD Opinion

Looking ahead, there are significant “headwinds”, that could lead to swift changes.

In particular, labour costs are expected to rise rapidly from April 2025, primarily due to government interventions such as the higher National Living Wage and changes to National Insurance.

With business margins depressed, some companies will be forced to reduce their workforce or scale back recruitment in response (see below).

The Bank of England Decision Marker Panel indicates that businesses have gradually lowered their expectations for wage growth and employment growth throughout 2023-24. As a result, the current relatively strong labour market performance may not last much longer.

Business confidence slump

A business survey conducted by the Chartered Institute of Personnel and Development has shown a decline in business confidence. Key findings include:

• Nine out of ten businesses surveyed expect their employment costs to rise

• The drop in confidence was most notable in the retail sector, where it fell from +23 last quarter to +1 this quarter

• One in four employers (25%) are planning redundancies in the next three months, marking the highest level in a decade outside the pandemic

• In response to increasing employment costs, 42% of affected employers plan to raise prices, while 32% aim to cut staff through redundancies or reduced hiring

More pub closures

The British Beer and Pub Association (BBPA) has reported that six pubs are closing each week, with 289 closures in 2024, resulting in around 4,500 job losses. The BBPA has urged the government to implement “meaningful business rates reform” and phase in new employment costs to help alleviate the impact on the sector.

IGD Retail Analysis subscribers can explore the key themes driving the away from home market over the next 12 months in the Away from home trends 2025 report.

Bird flu update

The government has announced that the avian influenza prevention zone (AIPZ) housing measures have been extended to cover Herefordshire, Worcestershire, Cheshire, Merseyside and Lancashire in addition to the East Riding of Yorkshire, City of Kingston Upon Hull, Lincolnshire, Norfolk, Suffolk, Shropshire, York and North Yorkshire.