Official estimates indicate that food inflation rose at its fastest pace in ten months in August, the fifth consecutive month of acceleration. At an annual rate of 5.5%, the cost of food and non-alcoholic beverages increased at its slowest rate since the beginning of last year. As beef, butter, milk, and chocolate prices increased, they soared by 1%. However, amid the rise in food prices, inflation in other areas, such as air fares, slowed, leaving the overall rate of inflation at 3.8% – the same as July. According to economists, food bills have increased because supermarkets have been passing on government increases in the minimum wage and National Insurance Contributions (NIC) to consumers.
Economic Outlook and Political Reactions
Overall, inflation remains above the Bank of England's 2% target, and hopes are rising that the bank's rate-setting committee will hold interest rates on Thursday. Rachel Reeves, the government's tax and budget proposals, said she knew "families are finding it difficult, and that for several families, the economy is stuck." She continued, "I'm determined to bring costs down and help people who are facing higher bills." Reeves had announced an increase in National Insurance Contributions for employers last year, as well as a rise in the minimum wage. Many companies, which believed it would result in higher customer prices, retaliated as a result of the decision, which caused a backlash from many organisations. Reeves told companies that she would not be "coming back with more borrowing or more taxes," but rumours that the chancellor will increase taxes are growing.
Shadow Chancellor Sir Mel Stride said price increases were "deeply worrying for families" and that Labour's tax plans are "stoking inflation." The Office for National Statistics (ONS), which publishes the data, said the 5.1% rise in food and drink prices was the highest rate for 19 months.
UK vs. Europe and Sectoral Impacts
According to the bank, the UK's inflation was "significantly higher" than the estimates for large European economies such as France and Germany. In August, France's inflation was 2.8%, compared to Germany's 2.1%. Yael Selfin, chief economist at KPMG UK, said the United Kingdom had been "an outlier" in recent months on inflation relative to other major economies. She added, "The rise in inflation has been largely fuelled by domestic policy choices, including the increase in employers' National Insurance Contributions." These higher prices have been "passed on by employers to customers, extending to higher headline inflation."
Some food items have already seen significant rises. Beef and veal prices increased by nearly 25% in the year to August, while butter prices increased almost 19% and chocolate rose by 15.4%. According to the British Retail Consortium (BRC), food costs were outstripping average wage increases, which the ONS estimated at 4.7% between May and July. "With food inflation now outpacing wages, many families will be struggling with the increasing cost of living," predicted Kris Hamer, the BRC's director of insight. However, the BRC said that the prices of some items, such as clothing and footwear, had decreased, partly due to retailers discounting the last of their summer collections. It also said that "key staples such as cereals and pasta dropped in price on the month."
The Bank of England's Dilemma
James Smith, a senior market economist at investment bank ING, said the inflation figure was "definitely not good news for the Bank of England." He told the BBC that at 3.8%, "The possibility of further interest rate cuts this year remains very much in the balance." In terms of where we go from here, he said, "food inflation could rise a little bit more into the year's end." The Bank of England has cut interest rates five times since last August, lowering borrowing rates to 4%. It has been reported that inflation reached a peak in September at 4%. On Thursday, the central bank is widely predicted to hold interest rates. The bank will have two more rate-setting meetings this year in November and December. Capital Economics said it is uncertain that the bank would cut rates in November despite a predicted rise in inflation. However, Paul Dales, the bank's chief UK economist, said, "We still expect the loosening labour market to slow wage growth and eventually bring down UK inflation to comparable levels as in the US and the eurozone, which will encourage the Bank of England to cut rates from 4% to 3% by the end of next year."
'NICs rise has stung'
Tom Egan, who co-founded and operates Coosh Bakery in Mapperley, Nottingham, with his partner Rachel, has been particularly affected by butter and chocolate prices. "Understanding weather in cocoa-growing nations, such as Ghana, has more than doubled the price we get from our suppliers," he said. "I believe we were paying somewhere in the region of £60 for ten kilograms," he said. "I believe it has now risen to over £150 for the same 10kg." Mr Egan's suppliers told him that butter prices have increased by 50% over the year because "the true quantity of milk imported into the United Kingdom has dropped dramatically, so clearly supply and demand have increased on things like butter." Meanwhile, he said that the rise in National Insurance Contributions had "stung a little bit," causing the bakery to be more cautious about investing in areas such as machinery and electronics, which could increase productivity.
