Food inflation: Eyes on the Budget

What’s happening?

New inflation data shows that all items inflation has continued to weaken, falling from 3.8% year-on-year in September to 3.6% in October, as measured by the CPI method.

The main driver is a reduced contribution from household utilities. Prices are still rising, but much more slowly than before, easing pressure on household budgets.

However, food and drink inflation remains a concern, providing the largest upward contribution to CPI in October as rates for food and non-alcoholic drink rose from 4.5% in September to 4.9% in October. This was driven by ongoing strong price increases in:

• Bread and cereals (especially specialised bakery products)

• Meat (especially beef)

• Chocolate and confectionery (especially chocolate)

These increases reflect category-specific supply issues, including shortages of beef cattle (in the UK and globally) and shortages of cocoa (especially from West Africa, where harvests have been affected by weather and disease).

The sector is also still absorbing historic production cost changes. In a competitive market, passing these on to shoppers is slow, so the effects continue to drip-feed into retail prices.

IGD forecasts on track

In July 2025, IGD forecast that food and drink inflation would peak in August at around 5.1%, then soften gradually through year-end, averaging roughly 4.0% across the year.

Food inflation did peak as predicted, but the October uptick was unexpected and conflicts with some other sources.

Still, one month does not signal a new trend, and competitive forces should limit further increases before Christmas.

Barring any major surprises, it is likely that average inflation will still be roughly 4.0% over the course of the full year.

All eyes on the 2025 Budget

Attention now turns to what is expected to be a challenging Budget for the Chancellor. Food businesses will be scrutinising potential measures that could:

• Add cost pressures to the supply chain, influencing food inflation

• Impact household finances, which could affect consumer spending patterns

• Signal longer-term policy changes, shaping costs well into 2026

While the Budget will dominate short-term planning, other factors will continue to exert pressure beyond 2025. Even without major shocks such as droughts, normal market forces – supply and demand for key ingredients – are expected to deliver at least some cost increases. These will sit alongside structural cost drivers such as:

• Labour costs linked to National Living Wage increases and consequent increases in pension and NI costs, since these are connected to pay; The impact of the Employment Rights Act, which will increase the cost and complexity of employing people, even for more advanced businesses

• Compliance costs from Extended Producer Responsibility (EPR) and future Deposit Return Scheme (DRS) rollout in late 2027

• Business rate adjustments affecting large retail properties and other properties higher in the supply chain

Together, these elements mean that cost management will remain a critical focus for food businesses into 2026.

What could it mean?

Price pressure on shoppers remains significant, with welfare implications for vulnerable households – millions of people may be affected by this.

For businesses, food inflation flattens demand making volume growth difficult. It also leads to margin compression, as businesses try to hold back price change and limit the impact on shoppers. This effort is hard to sustain, however – eventually, cost change has to be passed on.

In the meantime, margin pressure may manifest in other ways such as reduced capital investment, lower store staffing and more out-of-stocks.

If food and drink continues to stand out as an inflation “outlier,” expect greater scrutiny from government and advocacy groups.

What next?

IGD’s next food inflation forecast will be published in a Viewpoint Special report issued on 28 November, immediately after the Budget.