Food Inflation Briefing

This briefing looks at the factors which have been driving food inflation in recent months and explains how increases in food input costs filter through to the prices customers pay.

Drivers of food inflation

• Russia’s invasion of Ukraine, which significantly pushed up the price of energy and key materials and commodities. A significant rise in food inflation across Europe began following Russia’s invasion of Ukraine. Russia's decision to axe the Black Sea grain deal on 17 July shows how volatile this factor remains. 
• A tight labour market, where wages have risen due to competition for staff. Some retailers have raised pay two or three times in the last year.
• Rising input costs, including animal feed and fertiliser which remain high.
• The weak pound means that importing food is more expensive, although this issue is less prominent in the summer when the UK imports less produce.
• High energy prices effect all parts of the food supply chain, including farming, logistics, refrigeration and running stores. It is also a major issue for households.
• Transport costs have increased, due to the high price of oil.
• Government-imposed costs from new and upcoming regulation, including Extended Producer Responsibility (EPR) for packaging, Deposit Return Schemes (DRS) for drinks containers, restrictions on the placement of HFSS (high in fat, sugar or salt) food and drink (involving work to refit stores), and new customs and border processes (including those under the Windsor Framework) which start to come into effect this year.

Latest on food inflation

• The BRC-NielsenIQ Shop Price Index found that food inflation eased to 14.6% in June from 15.4% in May – the second consecutive month the rate of inflation has fallen – suggesting that it has peaked and is now beginning to fall. Retailers cut the price of many staples including milk, cheese and eggs.
• Supermarkets are limited in the prices they can offer by production costs: as these costs start to come down, prices will follow, as seen in some categories including including bread, milk and butter).
• There is also a lag as decreases in input costs filter through to prices, in part due to the fixed-term contracts supermarkets have with suppliers.
• The UK’s fiercely competitive grocery market means that UK food inflation is one of the lowest in Europe.
• The headline rate of inflation is not the same as an individual’s inflation – consumers are shopping around to get the best deals, highlighting the competitive strength of the UK grocery market.
• Overall inflation remains high as prices continue to react to increased costs in the supply chain, including commodity, input and manufacturing costs and a tight labour market.
• Upcoming regulation – including Extended Producer Responsibility (EPR) for packaging, Deposit Return Schemes (DRS) and HFSS location restrictions – in addition to new border processes for goods movements due to begin this October are adding to pressure on retailers, taking time, resource and money to prepare for.
• Retailers have worked to control inflation for years and continue to work hard to support their customers and colleagues, absorbing as much additional cost as possible, limiting price rises, offering discounts to vulnerable groups, expanding value ranges and raising pay (see here for more details).

Retail profits and cost absorption

• Supermarket profit margins are very slim, typically just a few pennies on each pound in revenue.
• Some of the UK’s largest retailers have reported falling profits in recent months.
• Profits are used to support community projects and charities - if margins contract further, retailers' ability to support these initiatives will be limited. 
• Retailers strongly value their relationships with suppliers and have been making significant investments to support them - one supermarket has invested £17m in British pig farmers alone.
• The first graphic below shows how the wholesale price increases on the ingredients used to make spaghetti bolognese, compared to the price increase customers see in store.
• The second graphic (source: BBC) shows the producer (farmer), processor and retailer costs in a £2.50 block of cheddar cheese – totalling £2.465 and leaving 3.5p in profit to be shared.
• Retail food businesses employ over 1.5m people, and this figure is almost double when the food supply chain (farmers, processors, wholesalers and distributors) is accounted for.