Food inflation – Are we finally in the clear?

Latest inflation data

The latest data from ONS shows that food and drink inflation has fallen once again, moving from 1.7% in May to 1.5% in June – a fairly small reduction.

After a very testing 2½ year excursion, food and drink inflation has now returned to “normal” levels and prices for some items are actually falling.

But … what now?

Are our shoppers finally in the clear, food-inflation-wise?

IGD recently issued a revised food inflation forecast as part of the July Viewpoint economic report. In this, we suggest that the downward “leg” of inflation is now coming to an end.

What next for food price inflation?

Looking ahead, we anticipate that inflation will level-off in the second half of 2024, before picking-up again.  Food and drink inflation is expected to be 1.0 to 3.0% in 2024 and 1.1 to 3.1% in 2025.

Whilst major price changes are dropping out of annual comparisons, there are several reasons to believe that inflation will be quite persistent, including:

• Employment costs continue to rise

• Farmgate prices remain very high

• There is no sign that manufacturing costs are falling

• Weather creates uncertainty around 2024 crop yields and quality

These factors mean that the cost of food shopping is not likely to fall much in the foreseeable future. Food and drink will continue to exert pressure on many households, until incomes catch up with living costs.

So, no, shoppers are not yet free from the dangers of inflation.

IGD opinion

Stepping back and taking a wider view, it is clear that the recent food and drink inflation “spike”, like others, was a consequence of uncertain supply and rising production costs. “Supply-side” issues, in other words.

It was not the result of a surge in overall demand on the part of UK consumers. There is little evidence of such a surge – in any case, volume demand in this market is typically fairly stable, determined mainly by population.

(Covid lockdowns saw significant food and drink volumes shifting out of foodservice and into retail, but lockdowns ended in April 2021, whereas food inflation began to rise from around October 2021).

If we wish to deliver lower prices and secure the supply chain against future inflation, we need to address supply-side pressures and risks, such as climate change, currency weakness, geo-political risk and energy costs.

This cannot be accomplished quickly. However, the new Labour government has explicitly recognised that food security is an element of national security (manifesto, p59).

Hopefully, this means that the government’s doors are open and that businesses in the food system can now connect with policy makers in a constructive way.

IGD wrote to the major parties and senior officials just before the election, outlining five suggested priorities for the future development of the food system:

• Building resilience

• Supporting sustainable agriculture

• Accelerating transition to Net Zero

• Building a future-fit workforce

• Securing a healthier future

We emphasised the need for businesses and government to work together on these, for the common good.

But IGD is not waiting.

We are helping to support industry development via our Social Impact programmes - as we have for decades. We have work in progress on Economics, Health, People, Sustainability and Resilience.

All of it is free to access in the Social Impact section of igd.com