Bulletin: Inflation eases, new pressures build

Middle East briefing 

Inflation eases, pressures build 

ONS reports that inflation fell, with all-items inflation dropping from 3.3% to 2.8% in April, while food and drink inflation eased from 3.7% to 3.0%, although this remains above long-term averages. 

This slowdown likely reflects a lag effect, as food supply chains take time to adjust to global shocks and rising energy, labour, and input costs. 

There are early signs that conflict in the Middle East is feeding through the supply chain, with higher diesel costs and potential fertiliser price increases for farmers. 

See our new article Middle East briefing: From inflation to impact to understand ten ways the shock is spreading through the value chain and what leaders need to do now to stay ahead of it. 

IGD opinion 

The slowdown in inflation may come as a welcome surprise, given the geopolitical pressure at work in the UK economy. However, at 2.8%, inflation is still well above the government target of 2.0% and there is no sign that the cost of living is going to fall any time soon. 

Also, it is likely that the full impact of conflict in the Middle East has not yet filtered through to UK households. As in previous energy price shocks, the household energy price cap – along with other mechanisms such as fixed price deals - is playing a role in delaying and smoothing the impact of global energy price rises for individuals in the UK. 

We may, therefore, be in a trough or calm period between inflation events. This certainly seems to apply to food and drink. There are signs of cost increases in the upper part of the supply chain – prices for red diesel and fertiliser are already rising in response to the Middle East conflict. 

With food margins low, there is no room to absorb further cost increase, so IGD anticipates that food inflation will pick up due to the conflict, later in the year and into 2027. 

Price cap speculation grows, but government rules out policy 

Media reports this week have highlighted speculation around food price caps, following an SNP proposal in Scotland. However, UK ministers have been clear this is not government policy, stating caps are “not something we’re looking at” and that other support measures are being explored.  

The Bank of England has also warned against the approach, with Governor Andrew Bailey saying price controls are “not a sustainable thing in the long run.”  

IGD’s Where does your food pound go? report shows why profits across staples remain around 1–2% (~29p on a £20 basket), highlighting that inflation is being driven by cost pressures, not excess profits. 

Read our article, Food inflation: Costs vs profits explainer 

Climate risks escalate for food system 

The Climate Change Committee has warned that heat, flooding, and drought are already disrupting the UK, with risks set to intensify.   

For the food industry, this has direct implications for supply chains and production. Extreme weather is impacting farm yields, water availability, and resilience, while increasing pressure on businesses to adapt operations. The report highlights the need for greater investment, better data on food system risks and stronger collaboration to maintain food security in a more volatile climate. 

See our latest article, Food Security, a climate crisis vulnerability

Growth upgrade 

The IMF has upgraded UK growth to 1.0% (from 0.8%), citing stronger recent momentum, but cautions that global shocks, domestic uncertainty, and higher energy costs continue to weigh on the outlook. 

Tariff cuts aim to lower food costs 

The Government is launching a business engagement exercise to support further reductions in agri-food tariffs, including the suspension of duties on over 100 products such as biscuits, chocolate, dried fruit, and nuts. 

The expected benefit to consumers is estimated to be over £150 million per year. 

The full product list will be published next week, with engagement commencing alongside it. The proposals are designed to avoid impacts on significant UK production, taking account of domestic food security considerations. 

Fuel duty support 

Fuel duty changes may offer less relief than they appear, as higher VAT receipts offset much of the benefit.

Motorists have benefited from a 5p per litre reduction in fuel duty since 2022. It was intended that this would end, gradually, over September 2026 to March 2027, but the government has announced that the concession will now be extended to the end of the year. 

• Duty on red diesel (used for agriculture and other purposes) will be cut by one third, from 10.18p to 6.48p per litre from June 2026.  

• Hauliers will get a VED “holiday” for 12 months, meaning a saving of hundreds of Pounds per vehicle. 

IGD opinion 

These measures may offer less support than they first appear, despite making economic sense given the impact of global events on the UK economy. This reflects the fact that fuel is subject to VAT at 20%. 

Whereas duty is paid on a pence-per-litre basis, VAT is charged as a percentage of the value of the goods. As prices rise, VAT receipts increase, meaning the cost of delaying the planned duty increase is offset, almost in full, by higher tax revenues. 

Labour market weakens, demand at risk 

The UK labour market continues to weaken, with implications for demand and workforce stability.  

New ONS data shows unemployment has risen, employment has fallen and the number of vacancies is at a five-year low. Job losses have been especially acute amongst smaller employers 

While wage growth has recently outpaced inflation (average wages were up around 4.1% year-on-year in the first months of 2026, whilst inflation was around 3.1%), it is now weakening as inflation pressure builds, meaning real wage gains may fade. This would have direct implications for household demand, even in essential markets like food and drink. 

IGD opinion 

Energy market impacts from conflict in the Middle East have wide economic implications, including in the labour market. But conflict is not the only issue – if it were, we might expect things to improve when the conflict ends. 

In reality, the gradual weakening of labour demand has been established for some years, pre-dating the conflict. The real issues are deep and complex, including low labour productivity, cultural shifts, educational outcomes and government intervention in the labour market. 

Providing secure and well-remunerated work is key to the future prosperity of UK households – the benefit of this will continue even into retirement, through the pensions that workers build up. 

However, fixing recognised structural issues in the UK labour market will likely take years. The food system can – and must - be a part of this reform, but it will mean making hard choices and, in particular, delivering more attractive wages.