Friday, November 22, 2024

Why could food prices go up when inflation is coming down?

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Sainsbury’s has warned that shoppers will face higher inflation due to an “unexpected barrage of costs” delivered in last week’s Budget.

The supermarket chain says it is going to be hit with an extra £140 million from the tax changes, suggesting that at least some of these costs will be passed onto the consumer, the Guardian reports.

While the retailer will be “looking to do everything we can to mitigate the impact” of chancellor Rachel Reeves decision to increase employers’ national insurance contributions, the industry’s “very low margins” means prices could go up, Sainsbury’s CEO Simon Roberts said.

At the other end of the supply chain, farmers have warned that an incoming environmental levy on imported fertilisers and other industrial products could also have a knock-on effect on consumers.

The warnings come despite CPI inflation in the UK falling in September to its lowest level since April 2021.

In October the chancellor announced she would raise employers’ national insurance contributions from 13.8% to 15% from April 2025, and slash the threshold at which businesses start paying from £5,000 to £9,100.

This is expected to affect the grocery industry in particular, as tens of thousands of part time workers in the sector currently earn between £5,000 and the current threshold of £9,100, meaning supermarkets will have to start paying extra for these employees. Sky News reports it could land Sainsbury’s and M&S with a combined extra bill of £200m as a result of the NIC changes.

London, England, UK - 28 June 2023: Front exterior view of a branch of Marks and Spencer in central London

M&S CEO Stuart Machin said raising taxes on the industry is the ‘easy way out’. (Alamy)

Raising the National Living Wage for those aged 21 and above by 77p to £12.21, and by £1.40 to £10 for those aged 18-to-20 is expected to cost the average convenience store an extra £5,449, according to Better Retailing.

Changes to pensions, capital gains tax, and a reduction of business rates relief are also expected to add more to the average store’s bill, which could end up impacting the consumer to some extent.

“Food price increases from next April are inevitable,” one industry source told Sky News.

M&S CEO Stuart Machin said: “Raising these taxes isn’t the hard decision, it’s the easy way out. It might improve the public finances in the short term, but it makes economic recovery harder and hits our customers and colleagues still struggling with the cost of living.”

“Given the speed these costs are coming at, they will be inflationary. We’ll do everything we can to mitigate that impact but there will be inflationary impacts, because our costs are going up, Sainsbury’s Roberts said.

Food prices could also be impacted at production level due to a new environmental tax on industrial goods like food fertiliser, farmers have warned.

The UK is set to charge a carbon levy on these goods in an attempt to prevent UK firms being undercut by overseas manufacturers.

The Treasury said the proposed new tax will come into effect in 2027, ensuring that imports of products such as iron, steel, aluminium, ceramics and cement from overseas will face a comparable so-called carbon price to those manufactured in Britain.

Buckingham, UK - March 22, 2018. A John Deere tractor sprays crops in spring in the Buckinghamshire countrysideBuckingham, UK - March 22, 2018. A John Deere tractor sprays crops in spring in the Buckinghamshire countryside

A tractor sprays crops in the Buckinghamshire countryside. (Alamy)

However, Norfolk-based wheat farmer James Alston warned this could put British food production in “continual decline”, telling the BBC: “We’re no longer in a position where farmers can keep absorbing these extra costs.”

Lord John Fuller, Tory peer and chairman of Brineflow, a supplier of fertiliser from outside the EU, warned the suggestion of as “golden age” of domestic fertiliser production is “for the birds”, adding: “This is just an extra tax on farmers which will go through into the cost of bread and beer.”

Reeves’ changes won’t come into effect until April, so what is the current state of food inflation in the UK?

In contrast to an overall UK inflation rate of 1.7%, food inflation was higher at 2.3% in September. The British Retail Consortium’s (BRC) chief executive Helen Dickinson said “poor harvests in key producing regions led to higher prices for cooking oils and sugary products”.

Grocery inflation rate.Grocery inflation rate.

Grocery inflation rate.

Fresh Food inflation accelerated in September, to 1.5%, up from 1.0% in August, the BRC said, although inflation of “ambient food” (which doesn’t need to be frozen or refrigerated) dropped slightly from 3.4% to 3.3%.

And though BRC figures showed food inflation slowing to 1.9% in October, particularly for meat, fish and tea, Dickinson warned the downward trajectory was “vulnerable to ongoing geopolitical tensions, the impact of climate change on food supplies, and costs from planned and trailed government regulation”.

The overall inflation rate is driven by a wider-ranger of factors with September’s drop was driven by large changes in the cost of air travel and fuel, for example. Some food staples – such as pizza and rice – actually fell in price, also easing the burden on households.

The overall inflation rate.The overall inflation rate.

The overall inflation rate.

Head of retailer and business insight at research firm NielsenIQ Mike Watkins added: “Inflation in the food supply chain continues to ease and this helped slow the upward pressure of shop price inflation in October, however other cost pressures remain.

“Consumers remain uncertain about when and where to spend and with Christmas promotions now kicking in, competition for discretionary spend will intensify in both food and non-food retailing.”

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