Food inflation at record high: how did we get here?
Leeann Nash December 6th 2022 - 4 minute read
Food prices reached a record high in the UK in October 2022, having risen by 16.2% on an annualised basis. This marks the largest increase since at least 1989, having jumped from 14.5% the month prior.
The data begs the question, why have food prices increased so rapidly and what can be done about it? As cost-of-living pressures push more households into poverty, there is an urgent need to address consumer prices to avoid the wealth gap becoming ever greater.
This article considers how food inflation became so entrenched and which products are most affected, as well as the actions that can be taken by those in the food industry to help alleviate the pressure on British households.
How did food inflation become so entrenched?
The price of groceries in the UK has been rising steadily since August 2021, when food inflation printed at 0.3% following a period of consecutive contractions. Around this time, non-essential retail outlets were allowed to reopen after a period of stringent Covid restrictions.
While supermarkets and grocery stores had been allowed to continue trading, outdoor venues such as pubs and restaurants remained still faced restrictions until this point. A sudden leap in demand for chef-prepared meals may have contributed somewhat towards the upswing in food prices.
As time has ticked by, we have seen that governments and food producers have been unable to tame that initial uptrend, to the point at which food inflation in the UK is now the third-highest out of the G20 nations, behind Argentina and Turkey.
According to official sources, there are a number of reasons for this. High on the list are supply chain bottlenecks, as geopolitical tensions and uneven rates of recovery in different countries’ manufacturing sectors has led to a skewed supply-demand ratio.
Also given as reasons for food inflation are fuel and CO2 shortages and rising logistical costs – such as the wage food producers must pay their employees.
Supply chain bottlenecks
Ironically, the relationship between inflation and supply chains is cyclical, so that higher food prices are now causing further supply chain disruption, perpetuating the cycle.
Back in January 2021, The Economist reported: ‘One in five purchasing managers report ‘port’ or ‘shipping’ delays, the most since 2004.’ Supply chain disruption was caused by a lack of capacity to transport and store goods, resulting in higher prices or else long delays.
‘Our private sector and public policy approach to domestic production, which for years prioritized efficiency and low costs, has resulted in supply chain risks.’
In short, the globalisation of supply chains, which cuts manufacturing costs by outsourcing labour to countries where it is cheaper, means more opportunities for problems to arise, which is what began to occur last year.
Compounding supply chain issues caused by the pandemic, geopolitical tensions have made international trading even harder.
Following Russia’s invasion of Ukraine, Ukrainian exports were disrupted, while many countries opted to boycott Russian produce as a sign of solidarity.
Geopolitical rifts caused by Brexit also had a role to play. ‘Increased trade barriers between the EU and UK, as well as the ongoing impact of the Trade and Cooperation Agreement (TCA)’ were given by researchers at the London School of Economics (LSE) as the main reason for a 6% jump in food prices since the end of 2019.
Fuel and CO2 shortages
The UK charity ‘The Food Foundation’ published a report in November 2021 in which they stated: ‘a major driver of food price inflation is fuel and CO2 shortages.’
‘Fuel is needed in the production process and for lorries to deliver food; CO2 is needed to stun animals, increase shelf life of products, enhance growth in greenhouses and make dry ice to keep food cool in transport and fertiliser, amongst other things.’
The repercussions of fuel and CO2 shortages – namely, an increase in their cost – has put many food producers and suppliers out of business in the past year, reducing availability and forcing food prices higher still.
Which products are most affected?
In the UK, inflation has affected food staples such as pasta, tea and vegetable oil the hardest – disproportionately impacting poorer households that rely more heavily upon such budget items.
According to the Office for National Statistics (ONS), other essentials seeing a double-digit percentage rise include baked beans, instant coffee and mixed frozen vegetables.
In other countries such as the United States, the picture is slightly different – the foods that have increased most in price over the past year include eggs, margarine and butter. Different domestic production and trade dynamics are likely to be behind the international variation.
What can the food industry do to ease cost pressures?
There are several options for food manufacturing businesses looking to cut their own costs as well as the prices they’re charging customers.
One of the most obvious solutions is to shop around for competitive deals – some suppliers may be offering cheaper produce to attract new business.
US business consultancy ‘Proudfoot’ cautions against sacrificing product quality, but advises that ‘when you know the real cost to serve every customer and produce every product, you can better prioritize them.’
This may look like reducing orders of food items that are less profitable, or else focusing on serving customers who reliably place large, regular orders.
Furthermore, business advisory firm FRP recommends seeking longer-term or fixed rate contracts when sourcing supplies. Benefits, the group suggests, can also be gained by joining a buying group.
Finally, maximise efficiency. Data visibility is important, as ‘Proudfoot’ stresses: ‘every kilowatt-hour saved can have a big impact on your bottom line.’
By keeping track of energy used per task – with the help of technology where necessary – businesses are better able to make informed decisions about which tasks need streamlining.
In times such as these, practising compassion by passing savings along to consumers is a responsibility that will pay dividends by earning repeat custom. While the temptation to maximise profits is strong, businesses must work to support struggling households, using their plight as motivation to tackle unnecessary business costs.