The Food and Drink Federation (FDF) has adjusted its food inflation forecast upwards as conflict in the Middle East escalates.
The trade body had previously predicted the rate of food inflation to gradually ease in 2026, ending the year around 3%.
However, with access through the Strait of Hormuz almost completely shut off and impact on oil and gas facilities in the Middle East due to the conflict in Iran, it now anticipates food inflation to reach at least 9% by the end of 2026.
The revision is based on assumptions that this crucial sea passage will open to cargo traffic in the next two to three weeks, with most key facilities – including oil, gas and fertilisers sites – returning to normal within a year.
Impact of Strait of Hormuz closure
An estimated 3,000 ships usually travel through the strait each month, with about 20% of the world’s oil and liquefied natural gas (LNG) passing through. Options to bypass it is limited, so its effective closure has real ramifications across the globe - most acutely felt in Asia.
Disruption to the worldwide oil and gas market is having a direct and immediate impact on production costs for UK food and drink manufacturers, with energy required at every stage of the production process.
Although many medium and larger sized businesses hedge fluctuations in prices with a mixture of contract lengths, they are bracing themselves for steep rises as contracts come up for renewal. Meanwhile, smaller producers, who don’t usually have such a long-term strategy, are already being rattled by climbing costs.
At the same time, transportation costs are also witnessing price hikes, adding further pressure, alongside ongoing shipping delays and a lost of sales to currently inaccessible Middle Eastern markets.
The agriculture sector is dealing with huge increases in red diesel which is used to power farm machinery. Since the start of the conflict this has surged 80% and availability is tightening in some regions of the UK.
Fertiliser markets remain tight and supply is a concern for livestock farmers especially. Meanwhile, crop growers – particularly those reliant on high levels of energy, such as for heating their greenhouses – will also be worried by the effects of volatile energy prices on supply and prices.
“The food and drink sector is already feeling the force of this geopolitical shock. As one of the UK’s energy intensive industries, manufacturers are facing mounting energy bills, rising transport and packaging costs and disruption across key supply chains. These pressures are hitting simultaneously, and are a significant challenge for businesses to absorb,” said Dr Liliana Danila, chief economist at The Food and Drink Federation (FDF).
“The current situation is unprecedented and hard to predict, however given the scale and speed of these cost increases, and despite companies’ best efforts not to pass price increases on, it’s clear that food inflation is going to rise in the months ahead.”
FDF calls for action
To help soften the impact for the sector and consumers, the FDF is calling on the Government to include food and drink in the British Industrial Competitiveness Scheme – which offers support with industrial electricity bills. Currently, the sector isn’t eligible as it’s not considered ‘Advanced Manufacturing’.
The trade body is also asking for the updates to the Nutrient Profiling Model (NPM) to be delayed and ‘outdated’ regulation to be scrapped to help ease the pressure faced by the sector, which has had to grapple with an array of change and additional costs recently as a result of EPR and the DRS.
