Forecasting food inflation
allmanhall’s Procurement Director, Mike Meek, explores the value of Consumer Price Index (CPI) when forecasting food inflation.
Consumer Price Index (CPI) is the rate at which the price of goods or services bought by households rise or fall. It can be thought of as a weighted shopping basket of goods and services that reflects household expenditure and is published by the Office for National Statistics on a monthly basis. It is the official inflation measure used in the UK Government’s target for inflation and supersedes RPI.
Items represented within the CPI basket are calculated by collecting a sample of prices for a selection of representative goods and services in a range of UK retail locations. Considering that one of its primary aims is to help in understanding the inflationary impact upon family budgets, it is worth exploring some of the items that are represented within the CPI food basket and support the broad CPI categories: relative costs for cheese spread, rotisserie cooked whole hot chicken, coffee pods, pack of individual cakes, protein powder, powdered baby formula, sweets, chewing gum, energy drinks, frozen chicken nuggets and microwavable ready meals (an anathema to most caterers, who offer fresh cook solutions). In light of this, it is my view that CPI in isolation does not wholly represent the complete catering marketplace perspective. CPI however, can still be a useful indicator.
Whilst CPI offers a historical and retrospective view of inflationary conditions, I would argue that it is of even greater importance to understand factors that may well influence future food prices, and that CPI is therefore most effective when used in context with a range of other tools, but not in isolation.
Many organisations, including those in the foodservice sector have often used these indices as a primary yardstick to measure inflation, procurement performance and to lay the foundations for future budgeting. During stable market conditions this approach is adequate, but food markets – which are much more complex than non-food markets – have a habit of throwing up a few unexpected surprises. With current uncertainty and signs of further market turbulence ahead, and the unstable status around our international trading arrangements, EU market access and agricultural subsidies, this retrospective view is made even less helpful when forecasting or predicting likely future changes to food prices; and there belies the problem.
There is a need to look forward, rather than back. This is the allmanhall approach and calls for CPI to be used in context with a range of other tools, but not in isolation.
By doing so, we keep our analysis and our predictions future focused and meaningful, providing you with regular updates that can be used to plan and prepare, and which we ourselves use in negotiations and procurement reviews.