Sharp step-up in food and drink inflation in July

Inflation rising again – what’s driving it?

The ONS data shows that year-on-year “all items” inflation in July 2025 was 3.8%, as measured by the CPI method, up from 3.6% in June.

A key reason for this change was transport, reflecting higher prices for air travel in particular.

Food and drink also made a large contribution. Inflation for food and non-alcoholic drinks in July was 4.9%, up from 4.5% in June – a sharp increase.

Food and drink made up about one-sixth of overall inflation pressure recorded in July with red meat, chocolate and beverages being especially powerful.

Food inflation has now been rising steadily for almost a year, making a significant contribution to the overall inflation outcome.

For alcohol and tobacco, inflation fell from 6.4% to 5.7%, whilst inflation for eating Away-From-Home moved from 3.9% to 4.1%.

The bulk of inflation pressure in the UK still comes from services, however. Taken as a single, very diverse, category, services made up more than half of inflation effect in July.

Consumers are feeling the squeeze

Inflation brings real and justified concern for consumers.

Rising prices continue to erode gains in pay and benefits, while also diminishing the value of savings.

Food and drink inflation carries particular emotional weight – IGD’s ShopperVista research consistently shows that consumers who expect to be worse off cite future food prices as their top worry, ahead of transport and energy costs.

When food and drink cost more, and when mood is depressed, consumers naturally become more cautious, using a range of tactics to limit spending. Inflation therefore tends to damp-down the volume performance of food retailers.

Tough choices ahead

Inflation is a concern for government as well

The Bank of England’s Monetary Policy Committee (MPC) has made several interest rate cuts in 2025, on the understanding that inflation was coming under control.

However, new ONS data shows that inflation is drifting away from the 2.0% target rate. The latest Monetary Policy Report warns that inflation will stay stubborn through late 2025, making further rate cuts less likely. It’s a reminder that interest rate changes take time to affect the real economy - and decisions are based on future expectations as much as current conditions.

Food inflation may be nearing its peak

Statistically, strong year-on-year inflation is hard to sustain beyond 12 months, as earlier price surges drop out of comparisons. Unless new pressures emerge, IGD expects food and drink inflation to soften soon.

The main risk is weather - UK farming has been hit hard by drought, though grain prices remain stable due to global trade. Items traded less widely, such as fresh milk or vegetables may be vulnerable to drought effects, however.

Real wages still rising – but for how long?

Looking beyond the food market, rising “all-items” inflation is a concern. For now, average wages are still outpacing price change, rising by about 4.6% year-on-year, meaning that “real wages” are rising.

However, inflation is gaining strength whilst wage growth is slowing, so this situation could conceivably change quite soon.