The era of cheap British food is over, according to economists. The Bank of England has warned that the inflation of grocery prices will continue in double-digits through the end of this year.
Officials from the bank said that, while retailers and suppliers “widely agreed” that the food inflation had “now peaked”, the prices would likely continue to rise for a long time. Own-brand products will see the largest increases.
According to the Office for National Statistics, food price inflation reached a 45-year peak in March. The rate has dropped sharply over the past few months but remains stubbornly high, at 17.3pc.
The Bank was told by retailers that they still expect food prices to increase at a rate of “around 10% or slightly less” per year, until the end of 2023.
Barret Kupelian is a senior economist with PwC. He said, “The bad news, is that food prices are not going to decrease, even though it is expected that food inflation will moderate. The era of cheap foods in the UK is likely to be over.
He called on politicians to do more in order to curb future price increases by bolstering the domestic food industry.
Andrew Bailey, Governor of the Bank of England said that stubborn grocery inflation surprised everyone. He said: “Food prices are declining and will continue to decline.”
It’s taking longer than anyone expected. “This includes many people in the food industry.”
On Thursday bank policymakers increased interest rates by one quarter point, to 5.25 percent. They warned that borrowing costs may remain at this level until 2026 in order to control inflation.
Inflation is expected to remain above the Bank’s target of 2pc for two more years.
Mr Bailey explained that the stubborn rise in food prices was due to farmers locking up higher prices after the Kremlin invasion of Ukraine last year.
He said, “I believe that’s what’s helping explain this slow passage-through.”
Officials from the bank said that food inflation is likely to fall “more slowly” than it has risen, forcing shoppers to make a trade-down in order to save money.
Bank of England noted that the most rapid price increases were seen on supermarket shelves for own-brand goods and value ranges.
The report also stated that “inflation tends to be higher in products sold by discount retailers”, such as Lidl or Aldi.
It said that “their operating model (fewer product lines, smaller and cheaper stores) means their profit margins are lower than those major grocery chains, so they’ve got less room to absorb cost pressures.”
Officials said that future price reductions would be “more likely” for products that are easy to process such as milk, butter and bread.
The biggest British supermarkets began reducing milk prices during the spring. Tesco, Sainsbury’s and Aldi are among the supermarkets that cut the price of bread in May.
In its latest Monetary Policy Report, the Bank said: “These staples could be a focal point of competition for supermarkets and margins on these goods could become significant squeezed.”
Mr Bailey stated that policymakers are also closely monitoring the implications of Vladimir Putin’s decision to withdraw from a Black Sea Grain Deal, which saw essential supplies being shipped from Ukraine.
The World Bank warned Monday that restrictions could lead to “considerable increases of world prices and price volatility”, whereas the International Monetary Fund warned that wheat prices may rise by up to 15 percent in response.
Jeremy Hunt welcomed a Bank of England prediction that inflation would fall more quickly in the short-term. He also hinted that tax cuts were not possible in the autumn.
The Bank of England also believes that the UK economy won’t slip into recession despite recent sharp increases in interest rates.
The Chancellor stated: “We as a government must ensure that we stick with that plan [to reduce inflation], and don’t veer off like a shopping cart.”