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UK retail trade signals prospect of higher food prices

Food Prices updates

Food prices are set to rise later this year as the shortage of lorry drivers and more regulatory checks on imported food combine with rising prices for fuel, freight and raw materials, experts have warned.

Retail trade bodies said the subdued food prices of the past few years may not last much longer. “The headwinds facing retailers are very significant, even if [higher prices] haven’t materialised yet,” said Kyle Monk, director of analytics and insights at the British Retail Consortium.

Fraser McKevitt, head of retail and consumer insight at market research group Kantar, said the cost increases, including recent wage rises and other incentives for truck drivers to alleviate shortages, “have been so substantial I don’t see how they can avoid price rises.”

Kantar’s latest four-week data, which track the prices of over 75,000 food and household items, showed food prices rising by 0.4 per cent year-on-year.

Inflation data from the Office for National Statistics showed food price increases in May and June, helping push headline inflation up, though they fell back slightly in the most recent period.

The government believes higher wage costs — increasingly evident in food processing and haulage as the supply of low-cost eastern European labour has fallen following Brexit — take a long time to feed through to prices on shelves.

“[Government] analysis is that a 10 per cent rise in labour costs over three years translates to a 2 per cent increase in food prices,” said Monk. But he pointed out that wage pressure was coming on top of dearer oil prices, sharply higher container freight rates and higher raw material costs.

The Food and Agriculture Organisation’s food price index for July was 31 per cent higher year-on-year, driven by meat and cereals in particular.

In such a competitive sector, decisions about which prices to raise, by how much and when are critical; McKevitt points out that for supermarkets nothing correlates as directly with market share as prices.

Steve Dresser, founder of consultancy Grocery Insight, said the last thing supermarkets wanted consumers to see was “higher prices on the shelf edge”.

In the past, they have proved adept at offsetting cost pressures by forcing suppliers to cut prices, reducing their own costs, or generating revenue by persuading brands to pay for in-store promotions.

But with suppliers now facing many of the same pressures, their ability to continue doing so is limited.

The first casualty is likely to be promotional activity. Supermarkets cut back hard on promotions at the onset of the pandemic because their operational complexity was interfering with efforts to keep stores fully stocked.

The proportion of sales made by items on promotion fell from 36 per cent to 21 per cent over the course of Tesco’s last financial year.

“By the summer [promotions] had started to come back and prior to this month that fed into deflation — as there were promotions this year but not in the comparative period,” said McKevitt. “But that damping effect is starting to fall away”.

Dresser said reintroduced promotions were often less generous than the original variants. “The deals have come back on, but they are weaker deals — say 2 for £2.50 instead of 2 for £2,” he said.

Another tactic is likely to be smaller pack sizes, known in the industry as “shrinkflation”. These are routinely used in areas such as salads and soft fruit to smooth the seasonal transition from UK produce to more expensive imported goods.

But they are also creeping in elsewhere; Dresser cites chilled chicken portions and ready-to-cook products dropping from 450g to 400g — effectively a 12 per cent increase if the item price is held constant.

The cost of food has been stable or falling for most of the past five years — partly because the main supermarkets have cut their prices in response to market share gains by discounters Aldi and Lidl — while the proportionate cost of food in UK household spending has consistently reduced over many years.

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