Key takeaways
- The Bank of England has reduced interest rates to 4% due to fears of rising food prices driving inflation.
- Food price inflation is projected to increase to 5.5% by the end of 2025 before gradually decreasing in 2026.
- Rising costs are attributed to factors like increased prices for cattle, cocoa and coffee, labour costs and roll-out of Extended Producer Responsibility.
- Consumers are responding to inflation already by opting for cheaper products and larger pack sizes for staples.
The Bank of England (BoE) has cut interest rates by 0.25 percentage points following a narrow vote by the Bank’s monetary policy committee (MPC).
This means the rate now stands at 4% – its lowest level since March 2023 – and comes over fears rising food prices will drive inflation upwards.
The Bank has said food price inflation is projected to be around 5% in Q3, 1.5 percentage points higher than expected in the May BoE report. It is then anticipated to rise further to 5.5% by the end of 2025, before falling back gradually in 2026 as pressures from labour cost increases abate and global wholesale food price inflation returns to historical averages.
What has caused a rise in food price inflation?
While food inflation is much lower than the double-digit rates seen in 2022 and 2023, it remains well above pre-pandemic levels of around 1.5%.
The Bank has attributed these rising costs to several factors, including cattle prices – which have increased by almost 20% in the last year, and sharp rises in wholesale prices for coffee beans and cocoa over the last two.
This has generally been a result of poor weather conditions – including droughts and heavy rainfall, which has affected grass growth and harvests.
Food and drink inflation is rising noticeably again and currently this shows no signs of easing.
Karen Betts, chief executive, FDF
At the same time, there is evidence that growing demand for coffee in emerging markets such as China, which has also contributed to the rise in global coffee bean prices.
In contrast, the wholesale prices for sugar and olive oil have fallen materially. The latter is driven mainly by more favourable weather conditions in Spain, which produces almost half of the world’s olive oil.
The Bank says that the pace of wholesale price increases has slowed in recent months, and if sustained, this will reduce pressure on retail food price inflation in 2026.
Domestic labour has also been driving up food price inflation. UK wage growth has eased, but it’s still much higher than in the euro area. Moreover, annual regular pay growth has been particularly strong in the food manufacturing (7.0%) and retail (7.6%) sectors.
Labour costs are expected to continue to push up food prices in the second half of the year, although the Bank says firms may not achieve full pass-through.
Consumers are already responding to high food price inflation by trading down, which is limiting retailers’ ability to up prices. This has resulted in an uptick of own-label purchases, alongside cheaper cuts of meat and food staples bought in larger value packs.
To reduce the need for higher prices, many firms along the supply chain have been trying to mitigate cost increases, including through reductions in headcount.
New packaging rules (i.e. EPR) are also anticipated to drive up food inflation, with the Bank estimating it could add a little over 1.5% to level of food prices if costs are fully passed through to consumers.
Industry analysis
Commenting on the interest rate cut, Karen Betts, chief executive at the Food and Drink Federation (FDF), said: “Global energy and commodity prices are rising once more, and this comes on top of new taxes and regulatory costs, like higher employer National Insurance Contributions and this year’s new packaging tax. Food and drink manufacturers try to absorb as many of these costs as possible to protect shoppers, but the fact is that making food and drink in the UK is more and more expensive to do.
“It’s critical that government takes decisive action to cut red tape and promote growth and investment across the food and drink sector, including ensuring there are no further cost increases to businesses in our sector in the autumn Budget.”
“Any interest rate cut is helpful for business and the latest 0.25% will be well-received. As inflation remains higher than the Bank of England would like, it may be that the predicted further cuts this year could be delayed. The biggest problems for the food and drinks sectors are low consumer demand, the lack of the feel-good factor and continually rising costs, squeezing margins,” added Julian Wild, director of Wilkin Chapman Rollits.
“Reducing interest rates is clearly designed to kick-start growth in the economy but there are too many headwinds and growth is very hard to find in the current climate.
“We face inevitable further tax increases and this is likely to choke off any signs of a significant recovery. There is not much light at the end of the tunnel for the Bank or the Chancellor.”
