Rising inflation in the food sector and a perspective on how to mitigate the increases

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The UK is emerging from a 30-year period where inflation has been less than 5%, including the last 10 where it has been less than 2.5%.  In that period, prices have been relatively stable but as we enter a period where inflation has most recently been recorded at 6.2% for the year to February 2022, and is forecasted to go considerably higher, the impact of a significant and sustained increase in the rate of inflation will feel very uncomfortable, manifesting itself for consumers in higher energy, fuel, and retail prices.  As a result of that, employees will demand better pay, however it is already clear that pay awards are struggling to keep pace with the current inflation rate.  This will place an unprecedented squeeze on living standards.

Whilst the pressure is felt within the UK, the causes are global in nature, driven by soaring industrial demand, rampant commodity prices and global political uncertainty.  Whilst the UK is under inflationary pressure, the inflation rate in January 2022 was at a 40 year high of 7.5% in the United States and 5.1% in the Eurozone, the highest level since records began in 1997.

In addition to the inflationary pressures, the UK has experienced historically low interest rates of less than 1% since March 2009 and, as a result, a significant and sustained period of inflation will inevitably put pressure on policy makers to raise interest rates in an attempt to cool prices.  Rising interest rates will however result in increased borrowing costs for both consumers and businesses.

The impact on the consumer

For consumers, the impact of significant and sustained inflation can be dramatic, particularly for those in less well-paid jobs, where borrowing and utilities costs represent a greater percentage of their take home pay. Inflation impacts all of us though, albeit unevenly. Many consumers will have little choice about these fixed costs, and it is not easy or even possible to avoid them. Simple actions such as using less fuel or energy help, but it is not without consequences, particularly for families.  Rental and mortgage costs will increase and attempts by consumers to fix the rates will be done in an inflationary market.

With less money left after bills, consumers will then need to make choices about how they spend what remains.  Food prices are perhaps one of the most immediate and sensitive areas where inflation is seen, for some producers of fresh foods in particular, the increase in production costs might result in business failure.  With costs increasing everywhere, it becomes a decision for consumers about where they shop, what they buy, brand or own label and which tier of own label, luxury or essential.  There are also decisions to be made about whether a premium can be afforded for products which are perceived to be healthier, more environmentally friendly, or locally sourced.  Consumers are already making those decisions, not necessarily changing the overall volume of product purchased, but significantly changing how and where they are spending their money.  Consumers are also going to be less forgiving about what they might see as unnecessary costs included in products, such as packaging, which is an area where food manufacturers can play a part (more of that later).

The inflation being seen across the food sector is not isolated to any one store, brand, country of origin or product tier.  Consumers are already making decisions about how to make their money go further.  Despite prices becoming increasingly “every day low”, promotions still play a part.  Pack size reductions will be made in an attempt to hold price points, but that reduces the volume per pack, not necessarily the overall consumer demand.  Loyalty incentives such as those offered by store cards play a part, as does the increasing willingness of consumers to shop around, challenging historic customer loyalty to achieve better value for money.

Supporting the consumer

Consumers are looking to policy makers, stores and manufacturers to help as much as possible and, whilst some of the inflation has been absorbed or offset, much of it will unavoidably end up in the cost consumers pay for the products they want to buy.  It is not enough for manufacturers to try and reduce consumer choice to increase production efficiencies (although that may play a part in order to simplify the shopping trip), they should also review the cost structure of every product to ensure that every part of that cost is truly necessary.  In a highly inflationary market, an opportunity might also now exist for a different view of locally produced products that have experienced less transport cost, have a lower environmental impact, are less energy intensive and require less packaging.  There might also be the opportunity to reduce the premium consumers pay between the standard and more premium tiers of product.

The outlook

Significant inflation though, is not endemic in the UK and this may well ease in 2023, reducing to more moderate levels over the medium to longer term.  Whilst inflation will temper over time, there are significant near-term challenges that must be addressed:

  • To support the consumers that need it the most where possible, through areas such as fuel and energy prices.
  • UK manufacturers will need to mitigate increased costs for their products to remain viable over the long term.
  • To ensure that important policy areas such as the environment and health do not become too expensive and out of reach for consumers.
  • To continue to provide consumers with a strong choice of what to buy at the point of sale.

In summary, consumers are already making difficult choices about how to spend their money. What they need is understanding and action from policy makers, stores and manufacturers to address the worst of the challenge.  Only together can the issues be overcome though, both producers and consumer must remain the front and centre of policy and decision making in order to ensure that food remains affordable and available.

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