Food inflation may look subdued today, but underlying pressures remain. Here's why we expect risks to build through 2027.
What’s happening?
Food inflation may look relatively subdued today, but that calm could be misleading. Many of the pressures driving higher costs across the food system have not disappeared. Instead, they have been delayed by factors such as hedging, stock positions, and subdued consumer demand.
For food and drink businesses around the world, the strategic landscape seems bleak right now, dominated by spreading conflict, extreme weather, and trade disputes.
All these things might be expected to drive food inflation up. Oddly, however, food and drink inflation seems rather muted at present, in Europe, the USA and here in the UK.
Part of this might be down to better management of cost change. Global food and energy stocks were fairly plentiful at the start of the year, allowing buyers to take advantage and to “hedge” aggressively.
And thank goodness they did.
The household position also plays a role. Shopper confidence in the UK and other major markets is not strong, so this is not a good time to pass rising costs on to shoppers (not that there is ever an ideal time).
What next?
These factors have combined to hold back inflation, for now, but only for now.
It would be unrealistic to imagine that huge events like six months of war in the Middle East or an exceptionally severe El Niño will have no impact on food and drink prices for shoppers.
This is why IGD anticipates that food inflation will return in the UK towards the end of 2026 and into 2027, as hedges begin to run out and businesses re-contract, at higher prices.
Hedging tends to delay inflation and to spread it out (if the hedger calls the market correctly), but it cannot prevent it entirely.
In a free market system, the forces of supply and demand cannot be defied, and, at some point, prices will respond to shortage and surplus.
System risk and volatility building
War in the Middle East will, hopefully, end at some point and peace, or at least stability, will return. This could allow some of the pressure on energy prices to ease. However, climate change and extreme weather seem likely to remain in place for some time, threatening food production, even as the global population grows and food demand increases.
What this means is that
first, food prices may remain higher than in the past and
second, vulnerability to further shocks and changes will increase, so price volatility will be a higher risk.
IGD has already determined that food price volatility is higher in the 21st Century than in the 20th, at least in the UK.
This may be the more important long-term lesson. The issue is not simply whether inflation rises in 2027. The bigger challenge is that volatility is becoming a structural feature of the food system. Businesses are increasingly operating in an environment where shocks are more frequent, less predictable, and more interconnected.
Valuing food once again
You may be able to recall an era when food shortage was not a major consideration in the West, for government, businesses, or shoppers.
In fact, in the 1970s and 1980s Western Europe’s major food problem was excess. The EEC’s Common Agricultural Policy (CAP) led to food mountains, which had to be disposed of in imaginatively costly ways.
Things are not the same now. Without catastrophising, it is clear that, in the 21st Century, food supply cannot be taken for granted anywhere in the world, including here in the UK.
Supplying food at an affordable, stable price will take planning, co-operation, and daring innovation. In other words, society will need to value food once again and put effort into ensuring future supply.
In this, there is positive change. Government is moving towards a more active, strategic approach to managing the food system in the UK. Key initiatives, some inherited from the previous government, include:
Farming Roadmap
Farm Profitability Review
Food Strategy / Good Food Cycle
Land Use Framework
Sector Growth Plans
The new Prime Minister also referred to the importance of food in his first PMQs.
This was reinforced at the Labour Party Conference, where Environment Secretary Dame Angela Eagle linked food security, farming resilience and productivity more closely to national priorities, describing food security as a strategic issue for the UK.
There is still much to do. Rolling out the government’s plans and turning them into commercial reality will take years.
There are also still significant blind spots where policy remains under development, particularly in workforce and skills.
The Chancellor and Prime Minister spoke about this at the Labour Party Conference, and the final version of the Milburn Review is expected soon, which will lend further structure to the government’s efforts.
In the meantime, IGD continues to work with industry allies to develop routes out of education and into the food system, as well as training solutions for colleagues.
The ultimate hedge
All of this work might be regarded as “hedging” the food system as a whole, reducing risk and ultimately protecting both businesses and shoppers from the volatility that the 21st Century has brought.
The lesson for businesses is clear. Today's relatively benign inflation environment should not be mistaken for a return to stability. Many of the underlying drivers of food inflation remain in place while vulnerability to future shocks continues to build beneath the surface.