Food inflation – what to expect and why
There’s been a great deal of coverage in the media regarding inflation rising at the fastest rate for thirty years. This time last year we were forecasting 2021 inflation, with a key factor being labour. In the end 2021 concluded with December’s annual CPI rate sitting at a lofty 5.4%. It is expected to go higher still this year, with many analysts forecasting a peak in the spring. This may be as high as 7% or more, as gas and electricity prices are set to increase further.
As we manage the supply chain and negotiate pricing proposals for clients, we are acutely aware of this upward trend. An understanding of the factors that now sit behind it is key…
As well as this article, you can read more about the outlook for 2022 here.
Why is the rate of UK inflation impacting goods more than services? And what are the implications for future food prices?
Inflation figures at the end of last year reaffirmed that a combination of factors are driving inflation throughout the entire supply chain. Mid-February will see January’s figures confirmed. It is reasonable to expect them to follow this trend. The rising global price of energy, surging commodity prices, higher shipping costs, labour shortages including drivers, are significantly impacting the annual rate of inflation for goods. The latter reached 6.9% in December, with services inflation at 3.4%.
The Office for National Statistics also reports that UK manufacturers have faced significant increases in input prices. These are the prices that manufacturers pay for goods before onward processing. The result? Significant increases in the price that they sell their goods (factory gate prices). Clearly this will have an impact on food procurement and therefore on catering costs.
- The annual headline rate of inflation for manufacturers input prices is 13.5%. Transportation and storage services are providing the largest upward contribution
- The annual rate of output prices (factory gate prices) for all items is 9.3%. This encompasses the following groups:
- Food products 5%
- Clothing 3.8%
- Chemicals 14.8%
- Paper 8.8%
What are the global commodity impacts?
- Weather (La Niña occurrence)
Global food prices, now at a ten year high, have been impacted by a La Niña weather event for a second consecutive year. La Niña is the cooling phase of a three-phase natural weather occurrence. It causes significant weather changes in different parts of the world. The result is drastic impacts on food production and harvest yields. These then reduce global food commodity inventories. Global inventory levels are important as they provide a protective buffer around food commodity prices. Reduced inventories make commodities much more volatile.
allmahall anticipate’s global food prices have now peaked but are still at eye-wateringly high levels. The Food and Agricultural Organization of the United Nations (FAO) measure global food prices using the FAO Food Price Index. This shows that food prices in 2021 were 28% higher than 2020.
The common denominator between our current decade-high food prices and the last inflationary peak in 2011 is that a double dip La Niña weather event also occurred in 2011 and 2012.
We expect the La Niña major weather event to continue to affect growing conditions up until June 2022.
To fully appreciate the part that weather events play on our agricultural production, consider this. Just three plants, rice, wheat, and maize provide 50% of the world’s nutritional needs. Global food prices are impacted by production output from a limited number of key exporting countries.
What part is the price of fertilizers playing?
Global fertilizer prices, particularly nitrogen, increased by 175%. This was partly driven by the cost of natural gas used in production. Several European production sites suspended activity due to “extortionate prices” of natural gas.
And what about the role of transportation?
Pandemic related shifts in supply and demand have led to a tenfold increase in breakbulk container prices. Whilst prices have fallen from their recent high, shipping costs for bulk and breakbulk shipments remain volatile. This is driven by a global shift in spending, with curtailed services expenditure and increased product purchases leading to higher levels of international shipping trade. The effects can still be seen by continued high demand, port congestion and the lack of availability of goods.
Some improvements in suppliers inbound service levels have resulted from increased stockpiling and a move from ‘just in time’ to ‘just in case’ supply chains.
So, in summary?
Pressure arising from increased commodity prices, labour shortages, energy prices and shipping disruption is set to continue throughout 2022. It is noteworthy that the Retail Price Index (RPI) was 7.5% when published in January. As food procurement experts we are awaiting the latest figures and closely monitoring analysis. Further updates will follow as we move into the spring. In short, we are approaching food supply chain management with an expectation that 2022 will see inflation upwards of 7%. We would advise you anticipate this, too.
If you want to learn more about the outlook for 2022, take a look here, in an article written by Oliver Hall, our MD.