Far-ranging and far-reaching factors forcing food inflation

Consumer inflation shopping trolley

The FAO’s food price index, tracking globally traded food commodities, rose to an all-time high in February 2022, up a staggering 20.7% y-o-y. The UK CPI food inflation stood at 5.1% in February. You can see this and all the latest market analysis and commodities reports here.

One of our previous blogs (also published by The Caterer in early April) explored the practical steps caterers can take to cope. As well as understanding what you can do, we’re here to shed light on why it’s such a challenge right now and to unravel some of the complexities.

Counting coins

We are currently experiencing this significant food inflation for a number of reasons. To understand this fully, it is imperative to recognise that our global food supply chain comes with input cost factors that seem unrelated and distant but are in fact impacting us every day. There are also factors originating closer to home. Let’s take a look at what these are and why they are forcing food inflation…

Covid-19

The Chancellor stated the UK experienced the ‘biggest economic shock for 350 years’ which will be felt for some time. The last 2 years brought uncertainty and increased operational costs, now being passed on.

Shipping

The Baltic Dry Index (measure for shipping costs) is still significantly above the 5year average. Higher input costs of shipping food are reflected in the eventual price.

Energy

Global energy costs have soared. In February’s Monetary Policy Report, the Bank of England put Sterling oil prices at 90% higher than late 2020; UK wholesale gas and electricity prices have also rocketed. In the spring statement, fuel duty was a key focus. We took a more detailed look at how that impacts food supply chains in a previous blog, which you can read here.

Geopolitical

The invasion of Ukraine has caused an abhorrent loss of life. It has also had significant consequences for food prices:

  • Continued energy cost implications. Europe’s dependence on Russian supply is impacted by tensions and economic sanctions from the West.
  • Russia and Ukraine account for almost 30% of wheat exports globally. There are market forecasts suggesting that volumes this year could be half the 5year average. This shortfall creates higher prices and let’s not underestimate the inflationary knock-on effect on other commodity staples too – increased demand for rice, potato and maize.
  • Russia controls 45% of global white fish supply.
  • Combined, Ukraine and Russia also account for 80% of sunflower oil traded…
  • And along with Belarus, they are key global fertiliser producers. A shortage of fertiliser is likely to result in reduced crop yields.

 

Take a look at this in more detail, here.

Labour Shortages

Andrew Opie, Director at the British Retail Consortium, stated that if labour shortages were not resolved in the near future, “we will start to see production being lost from the UK and being offshored, and then imported back into the UK”. 

Weather

Weather conditions are critical to food quality and pricing. This year saw La Niña for the second consecutive year. The last time we saw consecutive La Niña cycles we also experienced double digit food inflation.

Avian Influenza

The UK and EU are currently experiencing an outbreak of bird flu (HPAI). Free-range eggs have been restricted and thousands of birds culled. This – and increased feed costs – adds further pressure to poultry and egg pricing.

Supply disruption

There are numerous factors at play here. All the above, plus collapse of EU groupage for UK transport, inadequate port & warehouse capacity, and asymmetric EU import controls. A lack of trade deals or cross Government strategy are also generating strain. You can read more about this here.

What next?

The Bank of England has revised its projections upwards, predicting that inflation will peak at 8% in the coming months. EY suggests closer to 9%. A double inflation peak is forecast – with further upward pressures expected this autumn as energy price rises again and the full impact of harvest yields globally, and more specifically in Ukraine and Russia, are known.   

Wheat arrow

Unfortunately, food inflation will be with us for some time – the end of 2022 could still see 6% for general CPI inflation, easing back in 2023. At allmanhall we create insight and understanding, supporting planning for foodservice operators in these complicated times

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