Food inflation outlook in 2025

Higher food inflation in 2025

With the holiday period now over, businesses and consumers are looking ahead, pondering what 2025 might bring.

For many, a key question will be the future path of inflation, especially for essential purchases like food and drink.

Inflation grinds down the value of both income and savings, whilst also damping-down confidence. IGD’s ShopperVista surveys show that there is a close, enduring relationship between inflation and confidence.

Food and drink inflation stabilised at around 2.0% in Autumn and early Winter 2024, ending the year at the top-end of IGD’s forecast range, mainly because price rises for produce proved more persistent than expected.

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.

About one-third of this pressure will be attributable to policy factors and the remainder to underlying inflation caused by commodity prices and energy.

This is nowhere near the levels seen in 2022-23, but the cumulative impact of several years of elevated inflation on shoppers could be very damaging, especially at lower income levels.

UK food inflation in away-from-home outlets is likely to be even higher than in retail, due to higher labour inputs in this part of the market.

What’s driving higher food price inflation?

Predicting the future path of grocery inflation is never easy – business cost is influenced by many unpredictable factors such as weather impacts and global energy markets.

There are, however, some factors which are certain – timing is known and the impact can be estimated with some confidence. For 2025, most of these spring from government policy and regulatory change, specifically:

• Changes to employer National Insurance Contributions (NICs)

• Changes to the National Living Wage (NLW)

• Implementation of Extended Producer Responsibility (EPR)

• New border procedures

These changes will impact businesses of all kinds, but food and drink businesses will be hit especially hard – they employ large numbers of people, use large amounts of packaging and often use or sell imported goods.

These changes will undoubtedly add to business costs in 2025 and, with margins in many businesses already very thin, some – probably most – of the new cost will need to be passed on to consumers.

On this, IGD is more pessimistic than government forecasters at the Office for Budget Responsibility (OBR). IGD anticipates that as much as 80% of new costs will need to be passed on by food and drink businesses.

This compares with the OBR estimate of about 40% (although this applies to the UK economy as a whole, not to food and drink specifically).

Other than labour, trade and packaging, key inputs shared by food and drink businesses include food commodities and energy.

Prices for both are still high, by historic standards, although this does not mean big profits for operators. Many have absorbed previous cost changes, allowing margins to shrink and leaving no room for further changes.

Business implications

In some ways, ongoing inflation may be helpful for businesses, since it will help to maintain financial growth momentum at a time of weak demand growth.

However, it will not help to deliver a true industry recovery, which would require recovery in volumes. It is generally very difficult to grow both prices and volume in the food and drink market.

To learn more about IGD’s expectations for 2025, you can download out latest Viewpoint special report, Hungry for growth to understand:

• How the UK food system contributes to the UK economy

• Why building food system resilience is essential to achieving economic growth

• Our latest food inflation forecasts and their impact on shoppers

• The scale of opportunity that can be unlocked across the food system