Food inflation: Costs vs profits explainer

What the evidence shows 

This explainer summarises what IGD’s Viewpoint special: Where does your food pound go? report can, and can’t, tell us about profits, costs and prices. 

Analysis of nine everyday food products across the UK supply chain demonstrates that recent food inflation has been overwhelmingly cost driven, not margin driven. Between farming, manufacturing, packaging, logistics and retail, the entire food system generated just 29p of profit from a £20.24 basket in January 2025, equivalent to around 1–2% net margins, which have narrowed since January 2020. Rising prices reflect the pass through of energy, labour and other input costs rather than excess profitability. 

At a time of renewed volatility in energy and other inputs, and heightened political scrutiny of food prices, ‘Where does your food pound go?’ grounds debate in evidence about where costs and profits actually sit. 

What the data does (and doesn’t) tell us 

The evidence helps separate three ideas that are often conflated: 

• Higher prices don’t automatically mean higher profits: margins can remain thin even when prices rise, if costs rise faster. 

• Who is under pressure can vary by product and stage in the supply chain: the pattern is not consistent across farming, processing and retail. 

• This is an illustrative basket: results are directionally powerful, but a different basket (e.g., more branded, more processed, more premium) would produce a different distribution of value. 

Where costs have been rising 

IGD’s analysis places recent food price rises in context. Across the supply chain, businesses have faced sustained increases in: 

• energy and fuel costs 

• labour costs and skills shortages 

• agricultural input costs, including feed and fertiliser 

• regulatory and compliance‑related costs 

Despite these pressures, margins across farming, processing and retail have remained exceptionally tight. In many cases, businesses absorbed cost increases for extended periods before passing them on, meaning consumer prices often lagged cost inflation. 

When the system has limited financial headroom, trade‑offs become sharper. If costs rise again, absorbing them can further restrict investment, while passing them on can intensify affordability pressure and weaken consumer trust. 

Why this matters: investment and resilience 

Over time, the real challenge is the ability of businesses to invest to remain productive, resilient and secure. 

Longer term the system will remain vulnerable to price shocks without sufficient investment. 

What this means for industry 

For food industry leaders, the findings underline several critical points: 

• Plan for sustained pressure rather than expecting a return to normal, as food prices remain structurally high and inflation is mainly driven by costs rather than margins. 

• Act now to protect resilience in a low-margin supply chain by reducing reliance on loss leaders, improving financial visibility with partners, and prioritising sustainable pricing. 

• Focus investment on productivity and cost control through labour efficiency, automation, digital tools, process optimisation, and collaborative cost-reduction efforts. 

• Build predictable responses to policy-driven costs by scenario planning for regulation, simplifying packaging and compliance, and sharing evidence on policy impacts. 

The analysis provides a robust, evidence‑based platform for these discussions. 

What this means for government 

The findings suggest that sustainably moderating food inflation is less about expecting businesses to absorb costs and more about enabling investment, productivity and resilience, while avoiding unnecessary cost and volatility in the supply chain. 

• Implement the planned Food Inflation Gateway to assess the cumulative impact of regulation on the food industry, with a feedback loop to avoid unintended consequences for prices. 

• Limit additional cost pressures and reduce exposure to energy volatility, recognising the central role of energy inputs across production, processing and distribution. 

• Unlock funding and support that helps food businesses access reliable, affordable energy, strengthening resilience and investment capacity. 

• Work with industry on targeted interventions for households most at risk, providing access to affordable, nutritious food as prices fluctuate. 

Ultimately, a coordinated national strategy, underpinned by close government–industry cooperation, will best protect both household affordability and the long‑term security of the UK food system. 

How to use the evidence 

In a polarised debate around prices and profits, the ‘Where does your food pound go?’ report reframes discussion toward practical questions: 

• Where are costs rising fastest, and where is the least headroom to absorb them? 

• Which policies risk adding cumulative cost or unintended volatility? 

• Where would investment most improve productivity, resilience and long‑term affordability? 

Grounding decisions in this evidence is critical if the UK food system is to remain competitive, sustainable and capable of meeting future challenges.