Why soaring grocery prices are giving ministers food for thought

We don’t yet know if this Christmas will be a white one, but we may be certain it will be expensive. In cash terms, the cost of festive food and drink will be the highest ever. It is but one of the many consequences of British food price inflation running persistently above general inflation – a situation that makes us all poorer than we otherwise would be, and carries other dangers…

Latest data from the Food and Drink Federation (FDF) suggests the annual rate of food and drink inflation will hit 5.7 per cent by December, blaming the “financial burden of government policies”. The rate is already 5.1 per cent (in August), higher than Germany, France and the United States. The very latest forecast from the IMF sees UK inflation as being the worst in the G7 group of advanced economies. Britain is also exposed to exchange rate movements because it imports so much produce.

Beef, up 25 per cent on last year, with joints of all kinds of meat now protected by security tags in supermarkets. Butter, chocolate, coffee and milk are all up by double-digit inflation. But it’s been everywhere; food prices are, on average, 38 per cent higher than in January 2021.

The FDF is certainly correct to point to specific aspects of government policy. The hike in employers’ national insurance contributions may still be being passed on in higher prices - and food production, processing and distribution tend to be labour-intense. The new levy on packaging, to reduce waste and environmental damage, also drives up costs for groceries, albeit with a clear social benefit.

The industry also points to increases in minimum wage levels. Energy costs also remain elevated, and there is no sign that higher costs derived from Brexit and the war in Ukraine (fuel, grains and edible oils from that region) are subsiding. In global terms, climate change is also making its presence felt.

There is also evidence of a more purely domestic and self-driven inflationary wage-price spiral taking hold, something sparked by post-Brexit labour shortages, notably in horticulture.

Those on lower incomes. The proportion of their incomes devoted to food is larger, and getting bigger, even with increases in benefits and minimum wages, and those earning slightly above those minimum levels are seeing the least benefit from progressive policies. These are the families who find themselves putting items back on the shelves and, with rents and energy bills stubbornly high, find it increasingly difficult to make ends meet. When she was in Downing Street, Theresa May called them “the just about managing”; they are probably finding it even harder to manage these days.

Bad. Food price inflation – the cost of groceries, as Donald Trump identified it and its electoral potency – is particularly high-profile because we buy the same kinds of items often, and thus notice the rise much more than for other items in the consumer price index.

The ONS indexes correctly include things that are purchased infrequently or by only some – used cars, private school fees, football tickets – but which nonetheless form part of the cost of living for the nation as a whole. But it means inflation can be moderating more broadly even while food prices are still going up. Households are far more conscious of a few extra pennies on eggs or coffee than, say, electric cars being discounted by thousands of pounds.

As Trump discovered in his successful campaign against Joe Biden, voters hit by rising prices punish the governing party and reward politicians who raise the issue.

Such is the state of the public finances that little help can be expected on the tax or levy side, and it will be some years yet before renewable and nuclear energy supplies finally lower our energy bills after the squeeze on gas.

Ministers will probably have to steer clear of further “sin taxes” on fat and sugary products, and should avoid widening VAT to the likes of “ambient” takeaway meals – the infamous “pasty tax” that George Osborne attempted back in his 2012 omnishambles Budget.

In the end, food inflation is a monetary phenomenon that can only be dealt with by monetary policy: a squeeze on demand in the economy. Through income tax and the benefits system, the government can ameliorate the harshest consequences (for example, by lifting the cap on child benefit). Food banks and supermarket price-cutting on essentials such as bread, pasta, and tea - also help.