Food prices are 19% higher than a year ago. A grocery store that used to cost £50 now costs almost £60.
That prompted the Prime Minister to hold a food summit at Downing Street, but it’s still not entirely clear where the solution lies.
Last year the war in Ukraine pushed up the prices of food and energy, but lately those prices have come down a lot, so why not the bills too?
Here are five things that help explain what’s happening.
Russia’s invasion of Ukraine led to an increase in the prices of grain, sunflower oil and fertilizers. Concerns about a supply disruption triggered similar price hikes for other groceries.
The United Nations Food Administration found that global wholesale prices for meat, dairy, grains, oils and sugar rose by an average of about 20% after the invasion – but have since fallen.
Food production and trade are particularly energy-intensive sectors. Bills more than tripled for some businesses that could not access government support on the same scale as households.
Labor costs are the other big factor for food producers and sellers.
Increases in the minimum wage, labor shortages across the supply chain exacerbated by Brexit and the rising cost of living have led employers to give their employees pay rises of up to 9% over the last year.
All parts of the food chain have faced major shocks when their bills hit – but have they shared their fair share of the burden?
Much of our food chain operates at low margins, so there is limited scope.
Grab a slice of cheddar for £2.50.
In a study for the food alliance Sustain, scientists from the Universities of Portsmouth and London claim that the costs to farmers account for almost £1.50, while overheads for retailers and processors make up most of the rest.
They estimate this leaves 3.5p of profit to be shared, with the supermarket typically getting 2.5p (1% of the price) while the farmer gets less than apenny.
Arla, the dairy farmers’ cooperative, says costs have risen by up to 80% in the last year and it is challenging to absorb such increases.
For some items — especially processed foods and beverages — profit margins are higher. Unilever, which makes Magnum ice cream, or Premier Foods, the maker of Mr Kipling cake, can earn 15p for every £1 sold to retailers. As analysts say, the bigger the sin, the bigger the gain.
The Unite union accused big supermarkets of profiteering and said the three biggest chains had doubled their overall profits compared to the pre-pandemic period – albeit in 2021. Unexpected cost hikes have since hit all parts of the grocery chain.
Overall, supermarkets typically make a profit of around 5p per £ of goods sold – their profit margin. Last year, Tesco was only making around 4p per pound, while Sainsbury’s was closer to 3p.
Supermarkets are making a point of publicizing the price cuts on certain items such as pasta, dairy and oil. This reflects lower costs, but why aren’t bills falling overall?
It is often said that retailers are quick to raise prices but are reluctant to pass on savings when they might fall.
However, contracts for goods and services are often contracted many months in advance, meaning some manufacturers and retailers have fixed prices at last year’s very high prices and may be locked in for months to come.
The good news is that the rate of wholesale inflation that grocery retailers are facing, while still high, is now easing. That should result in small price hikes on the shelves – but it usually takes around six months.
With many retailers and caterers only releasing a breakdown of their numbers on an annual basis, we don’t know if some have taken this opportunity to try to rebuild their profit margins. They are under pressure from shareholders to do so. But when those numbers come out, they come under scrutiny.
As Brexit increases the bureaucratic burden of importing food, will we pay more for our food as EU buyers?
A study by economist Michael Saunders for the Oxford Economics research institute says that is not the case.
When it comes to food and drink options, prices in the UK are typically 7% below the EU average, with bread, meat and fish in particular being relatively cheap. He says the UK’s highly competitive supermarket sector plays a role in keeping prices down.
In contrast, before 2015 groceries were on average more expensive in the UK than in the EU – partly due to the relatively small influence of low-cost suppliers like Aldi and Lidl at the time.
The think tank Resolution Foundation projects household food bills will have increased by £1,000 by the summer since 2020.
While some items we buy may get cheaper, a return to the smaller bills we saw pre-pandemic seems unlikely.
Despite the recent declines in the price of some commodities, the prices of many things, from commodities to energy, are still far higher than they were before 2020. And there could be other factors at play – the full range of controls and other formalities surrounding imports from Europe Food continent, for example, has yet to be introduced.
Moreover, given the high costs, farmers are already going out of business, while the number of food manufacturers that are failing has risen.
- Take a look at your closets so you know what you already have
- First go to the reduced section to see if everything you need is there
- Buy things just before their sell-by date, which is cheaper, and use your freezer
Read more tips here
Add Comment