British households may face renewed pressure on their grocery budgets, despite an unexpected dip in food and drink inflation last month. Industry figures are cautioning that the temporary relief seen in May's inflation data is unlikely to last, with the full economic impact of the ongoing conflict in Iran yet to filter through to supermarket shelves.
Data released by the Office for National Statistics (ONS) on Wednesday showed that the rate of inflation for food and non-alcoholic drinks eased from three per cent in April to 2.2 per cent in May. This decline played a crucial role in stabilising the UK's overall inflation rate at 2.8 per cent, helping to offset rapid increases in petrol prices. However, while the effective closure of the Strait of Hormuz immediately pushed up fuel costs, experts in the food and drink sector anticipate a delayed but significant effect on food prices.
Karen Betts, Chief Executive of the Food and Drink Federation (FDF), which represents over a thousand UK food and drink manufacturers, stated that current consumer prices do not yet reflect the inflationary pressures stemming from the Strait of Hormuz situation. She explained that it typically takes several months for increased costs incurred by farmers, processors, and manufacturers to translate into higher prices for shoppers. The FDF had previously warned that food inflation could soar to between nine and ten per cent by the end of the year, a forecast that remains a significant concern.
This anticipated lag is reminiscent of the aftermath of Russia's invasion of Ukraine in February 2022, when food inflation initially trailed headline inflation before peaking at 19 per cent in March 2023. The Institute of Grocery Distribution (IGD) now expects food inflation to reach its highest point in the latter half of this year, with an average annual rate projected between 3.7 and 4.7 per cent. Their analysis suggests that families with children could see their annual grocery bills increase by an additional £203 this year and a further £207 in 2025.
Economists are urging the government to consider measures that could help mitigate these rising costs. Harvir Dhillon, an economist at the British Retail Consortium (BRC), noted that fierce competition among supermarkets has contributed to the recent fall in food inflation. Both the FDF and the BRC are calling on the government to reduce 'policy costs' on energy bills for manufacturers and retailers, and to streamline regulations, including pausing new healthy food rules, to help keep prices competitive for consumers in the long term.
The Foreign Office has updated its travel advice for the region, urging British nationals to exercise extreme caution in areas near the Strait of Hormuz due to heightened tensions. While direct trade implications for the UK are still being assessed, disruptions to global shipping routes and energy markets are expected to have a cascading effect on supply chains and, ultimately, food prices.
Source: Office for National Statistics, Food and Drink Federation, Institute of Grocery Distribution, British Retail Consortium