Food value inflation might rise to 4% in 2025 as analyst DOUBLES forecast

UK food inflation could near 4 per cent by the end of 2025 as supermarkets react to cost pressures arising from Labour’s Autumn Budget, according to analysts at Peel Hunt.

The broker on Monday doubled its forecast for 2025 food inflation from 1.5 to 3 per cent, reflecting higher employer national insurance contributions, a national living wage hike and the impact of the Employment Bill.

However, it said food inflation could grow throughout the year and by the end of 2025, the figure could be closer to 4 per cent.  

Peel Hunt also cited the UK’s overreliance on European Union imports and the country’s strained relations with the bloc, where an ‘unpalatable bureaucratic spaghetti’ and looming regulatory changes are set to further drive prices this year.

And while food prices are not a component of the Bank of England’s measure of core consumer price inflation, Peel Hunt analysts warned higher grocery costs could weigh on policymakers’ capacity to cut interest rates this year.

UK food inflation neared 20 per cent in early 2023 in the wake of Russia’s invasion of Ukraine the previous year.

Peel Hunt has upgraded its UK food inflation forecasts and says prices could rise 4% in 2025

The most recent data from the Office for National Statistics shows the 12-month CPIH rate for food and non-alcoholic beverages was just 2 per cent in November, though this was up from 1.9 per cent in October.

More recent data from market researcher Kantar showed annual grocery price inflation at 2.6 per cent in the four weeks to 1 December, up from 2.3 per cent in the previous four-week period.

Peel Hunt expects price growth to remain relatively stable during the first quarter, but the broker warned the outlook will ‘progressively change’ from April.

It said: ‘Cost recovery for the whole of the UK food system [will become] a new priority, the work of which we suspect started the day after the Budget in October.’

Chancellor Rachel Reeves announced in Autumn that employers will pay a 15 per cent National Insurance rate on staff salaries above £5,000, rather than the current 13.8 per cent levy on wages exceeding £9,100.

Peel Hunt said the change is ‘quite massive on an annualised basis’, potentially costing Tesco alone £250million, while key suppliers also face ‘state induced labour costs in the tens of millions’.

The broker thinks the impact will be equivalent to 0.5 to 1 per cent on ONS food prices.

The National Living Wage will go up by 6.7 per cent to £12.21 per hour from April, while the minimum wage for 18 to 20-year-olds will soar by 16.3 per cent to £10 per hour.

Peel Hunt said Britain’s top supermarkets already pay ‘near or above’ the new rate, but could be forced into wage hikes anyway to keep up with the rest of the labour market, while the impact will be felt more keenly by suppliers and manufacturers.

It also highlighted the Government’s controversial Employment Bill.

Peel Hunt said: ‘Quite when the Bill comes into force and in just what form, remains to be seen, but for the big labour employing UK food system and supermarkets in particular, as and when such elevated costs emerge, the impact is, again likely to be felt at the shelf-edge.’

It added: ‘We expect UK food inflation to build through 2025, possibly ending the year closer to 4 per cent, given the multitude of largely state and regulatory driven costs faced by the system.

‘For now, it is not food commodities, crude oil or sterling causing food inflation in the UK as opposed to the UK Government’s policies. 

‘So, when asked in 2025 why food prices are rising, send the postcard to 11 Downing Street.’

ONS data shows the impact of inflationary pressures in the wake of Russia’s 2022 invasion of Ukraine on retail food prices