According to analysts at Peel Hunt, UK food inflation could approach 4 per cent by the end of 2025 as supermarkets react to cost pressures arising from Labour’s Autumn Budget.
The broker doubled its food inflation forecast for 2025 from 1.5 per cent to 3 per cent on Monday, reflecting higher employer contributions to National Insurance, living wage increases and the impact of the Jobs Act.
However, it said that food inflation could rise throughout the year and that by the end of 2025 the figure could be closer to 4 percent.
Peel Hunt also cited the UK’s over-reliance on imports from the European Union and the country’s strained relationship with the bloc, where ‘unsavory bureaucratic spaghetti’ and looming regulatory changes are set to push up prices further this year.
And while food prices are not part of the Bank of England’s measure of core consumer price inflation, analysts at Peel Hunt warned that higher food costs could weigh on policymakers’ ability to cut interest rates this year.
UK food inflation approached 20 percent in early 2023 following Russia’s invasion of Ukraine the previous year.
Peel Hunt has upgraded its forecasts for UK food inflation and says prices could rise by 4% in 2025.
The latest figures from the Office for National Statistics show the 12-month CPIH rate for food and non-alcoholic drinks was just 2 per cent in November, although that was up from 1.9 per cent in October.
More recent data from market researcher Kantar showed annual grocery price inflation of 2.6 percent in the four weeks to December 1, up from 2.3 percent in the previous four weeks.
Peel Hunt expects price growth to remain relatively stable during the first quarter, but the broker warned that the outlook would ‘progressively change’ from April.
It said: ‘Cost recovery for the whole UK food system (will become) a new priority, which we suspect started the day after the Budget in October.’
Chancellor Rachel Reeves announced in the autumn that employers would pay a 15 per cent national insurance rate on employee wages above £5,000, instead of the current 13.8 per cent tax on wages above £9,100.
Peel Hunt said the change was ‘quite big on an annual basis’, potentially costing Tesco £250m alone, while key suppliers also face ‘government labor costs in the tens of millions’.
The broker reckons the effect will be equal to 0.5 to 1 per cent on ONS food prices.
The National Living Wage will rise by 6.7 per cent to £12.21 an hour from April, while the minimum wage for 18-20-year-olds will rise by 16.3 per cent to £10 an hour.
Peel Hunt said top UK supermarkets were already paying ‘around or above’ the new rate, but could still be forced to increase wages to keep pace with the rest of the labor market, while the impact would be felt more strongly by suppliers and manufacturers.
The Government’s controversial employment law proposal was also highlighted.
Peel Hunt said: ‘When the law will come into force and in what form remains to be seen, but for the large workforce that employs the UK food system and supermarkets in particular, when such high costs are introduced the effect is likely to be felt again. on the edge of the shelf.’
It added: ‘We expect UK food inflation to rise until 2025, likely to approach 4 per cent year-on-year, given the multitude of government and regulatory costs facing the system.
‘So far food commodities, crude oil or the pound are not causing food inflation in the UK contrary to UK government policy.
‘So when asked in 2025 why food prices are rising, send a postcard to 11 Downing Street.’
ONS data shows impact of inflationary pressures following Russian invasion of Ukraine in 2022 on retail food prices
