Food and drink inflation proving persistent

New data from ONS shows that “all items” inflation fell sharply in the latest month, moving from 2.2% annually in July 2024 to 1.7% in August, as measured by the CPI system. This change is likely to increase pressure for further base rate cuts.

Household energy and motor fuel exerted powerful negative influence (i.e. average prices fell, year-on-year), although this may dissipate in months ahead, due to changes in the Ofgem energy price cap and recent increases in global oil prices.

Most remaining inflation pressure comes from the services sector, probably due to ongoing wage growth. “Real” wages (i.e. wages adjusted for inflation) are still rising, gradually rebuilding some of the income lost during the cost-of-living crisis.

Inflation for food and drink specifically actually rose from 1.3% in August to 1.9% in September, which was not foreseen in IGD’s summer forecast – inflation in this market is surprising on the upside. Strongest inflation pressure is coming from oils and fats, fruit, vegetables, sugar and soft drinks.

IGD opinion

Inflation in food and drink is lower than we have seen in some years and is also lower than average wage growth, meaning that food is becoming more affordable for the “average” worker.

However, IGD’s research shows that a large body of shoppers remain under severe financial pressure and continue to look for ways to save money on food and drink.

Food and drink prices also play a powerful role in shaping overall shopper confidence, as shown in both IGD research and new research from the Bank of England.

The Bank research suggests that, given the psychological salience and impact of food price changes, the Bank should respond more aggressively to food price shocks than to general price shocks when adjusting monetary policy.

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, to 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.

The NLW is expected to rise again in April 2025, although it is not clear how much – hopefully the Budget of 30 October will provide some clarity on the future path of the NLW.

Other labour costs may also rise as a result of policy measures – employers should be alert to policy change on terms of employment and National Insurance.

Material and energy 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, other have seen modest price cuts (e.g. poultry, pork). Overall, farmgate prices have risen over the last year.

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

UK factory-gate food price in the UK remain stable, but elevated – it is clear that UK manufacturers are struggling to reduce prices.