Food inflation at 19.1%

Non-alcoholic beverages and food inflation was recently measured by the Office for National Statistics (ONS) at 19.1%, which is the highest we’ve seen food inflation since the summer of 1977.

The ONS also measured the UK’s overall rate of inflation at 10.1% in March, down from 10.4% in February. This decrease wasn’t as big as experts were projecting, with many expecting the inflation rate to be sitting closer to 9.8% in March.

So, what’s causing food inflation? Was food inflation to blame, and what next for the interest rate?

Why is food inflation at 19.1%?

The highest levels of food inflation in over 45 years is being blamed on high commodity and production costs. However, food inflation may still be increased by the supermarket salad shortage which was a big talking point during February’s inflation data.

Some of the staple foods we need to buy each week are at their highest levels. For example, food inflation is particularly affecting the cost of bread, eggs, cereals and milk. The better news is that the prices of many fruits and vegetables are predicted to fall as the UK’s economy gathers pace, including tomatoes and cucumbers.

Are food prices to blame for higher overall inflation?

The simplified answer is yes. Rising food inflation is partially offsetting the decrease in the rate of inflation in other areas, which is why the overall rate of inflation hasn’t come down as much as experts were predicting.

The Chief Economist at the ONS, Grant Fitzner, stated that fuel and heating oil prices had declined, whereas the cost of clothing, household items and furniture had all increased but at a slower rate than one year ago. These all contributed to a lower rate of inflation, but this was offset by increased food prices.

Energy costs remain the big driver behind the current cost of living crisis, and unfortunately, that isn’t something in the control of policymakers. Energy costs are significantly reliant on external factors and events, including Russia’s illegal invasion of Ukraine.

How will the Bank of England react?

It was hoped that an inflation rate close to estimates of 9.8% might allow the BoE committee to put a pause on interest rates, bucking the trend in a current 11 consecutive rate rises. However, those hopes may have been dampened somewhat due to high levels of food inflation and a higher-than-predicted overall inflation rate.

On top of this, another metric closely watched by the BoE is core inflation. Core inflation measures the inflation rate by excluding data regarding energy costs and food prices. Because energy and food prices are considered volatile, monitoring core inflation can also help the BoE decide how to manage the base rate of interest. Unfortunately for borrowers, core inflation hasn’t budged and remains at 6.2%.

The financial markets are predicting a rate rise of 0.25%, which would take the base rate to 4.5%.

May 2023