Why are food prices rising?
29 July 2022
By Dr Liliana Danila, Economic Policy Manager, the Food and Drink Federation
We have all noticed significant rises in the cost of food in our shopping baskets. This is set against the backdrop of the highest inflation in the UK in the last 40 years which is challenging for both businesses and consumers.
Food and non-alcoholic drink prices have been rising for the past 11 months and were almost 10% higher in June than they were a year ago. Price rises are being seen in a variety of different food and drink, from cooking oils and meat to fruits and coffee. Unfortunately, food inflation is set to continue well into 2023.
How did we get here? A big part of the story is the impact of a series of disturbances - including Covid-19 and the Ukraine war - have driven up prices of global ingredients, materials and energy.
Global food prices have been climbing since October 2020, long before the war in Ukraine. This pre-invasion surge in food prices stemmed from the recovery in world food demand, unfavourable weather conditions, logistics disruptions, and more expensive fertiliser, labour and transportation costs. The invasion of Ukraine added further pressures. Ukraine and Russia were significant global suppliers of wheat, other grains and sunflower oil, and Russia was a major player in the fertiliser and natural gas markets. The war in Ukraine has severely disrupted the supplies of these goods.
All of this means food and drink manufacturers have been faced with relentless and significant cost rises for nearly two years. Compared to October 2020, vegetable oil prices have almost doubled and cereal prices are 44% higher. On top of that natural gas prices have quadrupled and aluminium prices are up by 60%. The costs of everything that is needed to make food, including ingredients, raw materials and energy have increased.
It takes anywhere between seven to 12 months for cost increases that food and drink businesses are facing to filter through to the prices we see on supermarket shelves. This points to three things. Firstly, the pandemic-related cost increases have not fully been passed down to the shopper yet and the Ukraine war impacts are yet to be seen. Secondly, comparing the rise in retail prices and rise in costs, it’s clear food and drink manufacturers have absorbed a significant part of the hike in costs. The sheer size of the surges, in all aspects of the business, have severely squeezed margins, and meant that some of these cost increases needed to be passed on. And, finally, this means we’ll see food prices continue to rise.
Understandably, the mood in the UK is turning more pessimistic by the day. The latest GfK survey shows consumer confidence has sunk to a record low, suggesting UK households were more worried in June than they were in the beginning of the pandemic or even during the 2008 financial crisis. And the less affluent households are bearing the brunt of this shock. In 2020, before inflation started taking off, the poorest households were spending over a third of their disposable income on food, housing and energy.
Moving forward in these tough times, it is vital the UK and Scottish governments work with the food and drink industry to help ease pressures facing businesses and shoppers. This could include the UK Government looking at VAT reductions on standard rated food and drink, as they did during the 2008/9 food price crisis. Governments across the UK can also work together to reduce the cost and complexity of policy and regulation. For example a more joined up approach is needed to improve packaging and recycling across the UK without adding extra costs to businesses and consumers during difficult times.
To note: This article was orginally published in the Scotsman on 28 July 2022.