Bulletin: Food inflation risks remain

Food inflation eases – risks remain

Food and drink inflation fell sharply at the start of the year. Inflation in the food and drink category dropped from 4.5% in December to 3.6% in January, a much faster decline than IGD had previously forecast. This 0.9 percentage‑point fall made a significant contribution to the reduction in overall inflation to 3.0%.

See our latest article - Food inflation eases – but risks remain.

IGD opinion

This is welcome news for consumers, but it should not be over‑interpreted. One month of data does not mark the start of a new trend. Food prices are still rising, and food remains more expensive relative to both average pay and to other household essentials. There is therefore no room for complacency. Inflation risks remain embedded in the food system, and price pressures could re‑emerge quickly if underlying costs rise again.

Overall inflation declines

New data from ONS shows that all items inflation fell from 3.4% year-on-year in December 2025 to 3.0% in January 2026, as measured by the CPI method. This is still well above the government’s 2.0% target, but current OBR forecasts suggest that inflation will continue to fall steadily through 2026, reaching target by 2027.

Labour market data – industry impact

New ONS  data shows that unemployment has risen to 5.2%, with youth unemployment at 16.1%, expanding the available labour pool but increasing household vulnerability. Payrolled jobs and vacancies are falling, signalling cooling labour demand. Wage growth is slowing and only just outpacing inflation, while labour costs remain elevated following earlier NLW increases. 

See our latest article - UK labour market: Food industry impact.

IGD opinion

The labour market is easing rather than collapsing. Hiring should become easier, but weaker consumer spending, persistent skills shortages and sluggish productivity will continue to constrain growth.

Environmental data: the commercial advantage hiding in plain sight

Environmental data is no longer just a sustainability reporting tool - it’s a growth opportunity. New IGD insight shows businesses across the food system are sitting on data that is “good enough” to inform real commercial decisions, but few are using it beyond compliance. Those that act now can unlock value, reduce risk and build long‑term resilience.

Key findings:

• Environmental data is ready for commercial use, not just reporting

• Applying it can drive growth, cut costs and strengthen investor confidence

• The biggest barrier is confidence and capability, not data quality

• Early movers will help shape future standards and partnerships 

See our latest article - Unlocking commercial value from environmental data.

Options to reduce food prices before 2029

A new briefing from the Centre for British Progress and the Living Standards Coalition outlines how the UK government could reduce food prices before 2029 through targeted, near‑term reforms. The report states that food prices remain elevated after rising sharply since 2020, driven by Brexit trade frictions, high energy costs and supply‑side pressures. Key findings include:

• Food prices remain high, hitting low‑income households hardest

• Supermarket margins are thin, limiting scope to absorb further cost rises

• Lower prices must come from reducing costs and barriers across the supply chain

• Strong competition oversight is needed to ensure savings reach consumers

IGD opinion

For some time, IGD research has highlighted rising costs and supply constraints as major reasons for food price inflation in the UK. Stabilising and – hopefully – reducing prices will require investment in industry capability over a long period. This, however, is hard to execute at present, due to a combination of low margins and strategic uncertainty. Government does, however, seem aware of the importance of managing future market interventions in order to prevent unnecessary new costs for business, as shown by announcement of the new Food Regulation Gateway by Defra in November 2025.

Employment Right Act warning

New research warns that the Employment Rights Act risks further weakening hiring intentions. More than a third of employers’ plan to reduce permanent recruitment as they anticipate higher employment costs and greater workplace conflict linked to the Act’s reforms. Hiring intentions are already at their lowest level outside the pandemic, raising concerns about job creation and security.

IGD opinion

These negative and unintended outcomes were signalled when the Employment Rights Bill was under preparation (e.g. by ICAEW and the CBI), so they do not come as a surprise. 

With skills shortages already entrenched, cutting headcount risks weakening capability and resilience. Rising employment costs make increasing productivity of workers essential.