UK inflation dips as food and energy costs remain high
Cash-strapped families are facing the steepest rise in grocery prices since records began – with annual shopping bills predicted to rocket by £788 this year. The cost of basics like bread, butter, cheese and milk is up 16.7 percent year-on-year, says a report by analysts Kantar. It was among a deluge of grim financial news that rained further blows on households battling the cost-of-living crisis.
The Bank of England is set to raise interest rates for the tenth time in a row on Thursday, forcing up monthly mortgage payments.
And the International Monetary Fund forecast that the UK economy will shrink this year – the poorest performance of any developed country including Russia.
Ministers pointed out that IMF was often wrong but an IPSO poll says 67 percent of people believe the worst is yet to come.
The hike in grocery prices is the biggest since analysts Kantar started monitoring food inflation in 2008.
It said the latest increase will see the average annual food shopping bill rise by £788 to £5,504.
Grocery prices ballooned by a record 16.7 percent year-on-year
Fraser McKevitt, head of retail and consumer insight at Kantar, said: “Late last year, we saw the rate of grocery price inflation dip slightly, but that small sign of relief for consumers has been short-lived.
“Grocery price inflation jumped a staggering 2.3 percentage points in January to 16.7 percent, flying past the previous high we recorded in October 2022.
“Households will now face an extra £788 on their annual shopping bills if they don’t change their behaviour to cut costs.” Figures show soaring food prices have forced people to make radical changes their food buying habits.
Four in 10 families with children under 12 are replacing meat with carbohydrates like bread and pasta to bulk out meals and save money.
Nearly a third buy less meat while 18 percent buy fewer fruits and vegetables, says the food and farm standards scheme Red Tractor.
Kantar figures show sales of own-label ranges grew 9.3 percent in January and the more expensive supermarkets have lost trade to cheaper rivals.
Sales at Aldi and Lidl have jumped around a quarter year-on-year.
Costs of basic products like bread, butter, cheese and milk are up 16.7 percent year-on-year
Upmarket rival Waitrose saw its customers halve, from 33 percent to 14 percent, as did online supermarket Ocado, which dipped from eight to four percent.
One supermarket boss blamed suppliers for price rises, saying it was “entirely possible” food producers were taking advantage.
Tesco chairman John Allan told the BBC that Britain’s biggest supermarket chain had “fallen out with suppliers” over prices and was
trying “very hard to challenge cost increases”.
But Ged Futter, a former buyer for Asda, called his comments “outrageous” and said Tesco was on course to unveil profits of £2.5billion for the past year.
He said: “Some suppliers are profiteering but, at the same time, we also know that some retailers are putting up their prices higher than the inflation they are receiving.”
Europe cost of living crisis
Other supermarket giants such as Morrisons said they were taking a more “robust” approach in their discussions with suppliers. Helen Dickinson, chief executive of the British Retail Consortium, said: “Retailers still face ongoing headwinds from rising energy bills and labour shortages, prices are yet to peak and will likely remain high in the near term as a result.”
And Mike Watkins, head of retailer insight at NielsenIQ, added: “The increase in food inflation is going to put further pressure on household budgets and it’s unlikely that there will be any improvement in the consumer mindset around personal finances in the near term.”
Food, along with the cost of many other products, has become more expensive largely due to the surge in energy prices seen since Russia invaded Ukraine last February.
At 10.5 percent, inflation is well above the Bank of England’s two percent target.
Its policymakers are expected to impose a further rise in the base interest rate on Thursday – 0.5 percent to four percent, the highest level since the 2008 financial crisis. Many economists predict a further rise to 4.25 percent next month.
The IMF said Britain’s economy will contract by 0.6 percent in 2023 rather than grow slightly as previously predicted.
But it thinks the UK is now “on the right track” and would grow by 0.9 percent next year.
Britain is thought to have had the fastest growth in the G7 last year at 4.1 percent.
Chancellor Jeremy Hunt said: “The Governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted.
“However, these figures confirm we are not immune to the pressures hitting nearly all advanced economies. If we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years.”
The IMF said it had downgraded its forecast for the UK because of our high energy prices, mortgage costs and taxes, as well as persistent worker shortages.
In a round of interviews, Transport Minister Richard Holden said of the IMF predictions: “They’ve been wrong in the last two years, the OECD were also wrong over the last two years. I think Britain can beat those predictions.”
COMMENT BY JULIAN JESSOP
The IMF predicted the UK will be the only major economy to shrink this year. And grocery price inflation hit a record high.
Nonetheless, the IMF’s pessimistic forecasts should be taken with a fistful of salt. Its track record is poor and some of its assumptions look out of date. It is also daft to focus on one year’s growth.
Inflation should fall sharply this year, even if the Government does nothing. However, the UK’s economy has been underperforming for years.
We desperately need a comprehensive pro-growth strategy to tackle the issues holding us back, including a fall in the number of people seeking work, weak investment and high energy costs.
An ambitious programme of reforms is required to boost productivity and wages.
Perhaps the IMF does have a point here.
Its reasons for being relatively pessimistic about the UK include tighter fiscal policy and the earlier withdrawal of energy bill support.
This should add to doubts about the wisdom of raising taxes even further, including the planned hike in corporation tax, ending the “super deduction” on capital spending, and extending ‘windfall taxes’, all of which damage investment.
A sharp fall in global energy prices means the Government can probably scale back subsidies.
But the UK energy market also needs more fundamental reform.
My sense is that the Government understands a lot of this. The dull competence of Rishi Sunak and Jeremy Hunt has definitely helped to calm the financial markets.
But it seems a shame that this cannot be combined with the bold vision of former prime minister Liz Truss and her chancellor Kwasi Kwarteng.
Julian Jessop is Economics Fellow at the Institute of Economic Affairs