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Retail food price inflation to hover around 2% for next two years

By Elaine Watson , 22-Jul-2010
Last updated on 22-Jul-2010 at 20:01 GMT

Food manufacturers will be under pressure to absorb higher raw material and energy costs this year to ensure their products remain affordable as household budgets are squeezed, English Food and Farming Partnerships (EFFP) has warned.

Agri-food consultancy EFFP, which has developed a retail food price forecast with Cranfield School of Management, said measures announced in the emergency budget - notably the rise in VAT – would dent consumer spending power: “Faced with fragile demand, the food chain will strive to absorb higher raw material and energy prices.”

Meanwhile, retail food price inflation was likely to “hover at around 2%” for the next two years – barring any major shocks to the economy – it predicted.

Its forecast was issued as Kantar Worldpanel released figures suggesting that grocery price inflation was 1.7% in the 12 weeks to July 11 (based on purchasing data from its panel of UK shoppers on more than 75,000 products).

Kantar communications director Ed Garner said: "This low inflation environment will be reflected in lower average growth for the grocery market and creates a challenge for retailers to deliver growth against earlier strong comparatives."

Food inflation vs general inflation

But the days when food inflation was always lower than general inflation were probably over, predicted EFFP.

“Over the quarter of a century to 2006, food inflation was persistently below the general rate of inflation.

“But there is now a greater probability that retail food prices will increase in line with, or even faster than consumer prices generally: a situation not witnessed for at least 30 years.”

Input cost inflation

And while there was no immediate risk of a repeat of the unprecedented hikes in commodity prices witnessed in 2007-8, population increases and rising dairy and meat consumption in China and India meant prices would not return to the lows seen prior to 2007, predicted EFFP.

“It is now widely agreed by experts, including the OECD and the FAO that agricultural prices will remain significantly above their levels in the early years of the millennium and will display much greater volatility than in the past.”

On the plus side, much of the effect of the drop in the value of sterling during 2007 and 2008 had already worked its way through the food chain (in the form of higher costs for UK firms buying raw materials in other currencies), with further depreciation unlikely, it said.

“Given the likely positive effect of the emergency Budget on sterling, the exchange rate is unlikely to exert any significant upward pressure on food prices in the coming year.”

It was too early to talk about the UK wheat harvest, which will commence next month, but it was already clear that the global harvest was likely to be lower than the previous two years, noted EFFP.

“The mainly bearish tone earlier in the year has given way to some concerns regarding cereals production in Canada and the EU. The effect of these concerns has been to push forward cereal prices higher though it is too early to gauge the final outcome.”

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