Sunday, May 21, 2023

Eat or Heat?

Rising food prices will soon overtake energy costs as the main force fuelling inflation in the UK, an independent think tank warned in a report on Friday. Food makes up a far larger share of the typical household’s consumption than energy, says the Resolution Foundation, whose aim is to improve living standards for those on low to middle incomes. As grocery prices will remain at a high level while energy costs decline, this summer “food costs will have overtaken energy bills in the scale of the shock they are administering to family finances,” the think tank predicted. Grocery bills have jumped by almost 20% during the past year, official figures for March showed, with the overall consumer price index standing at 10.1%. Energy prices peaked at record levels last year but have since declined significantly.’

‘The cost of living crisis is often thought of as a cost of energy crisis. That is an understandable, but increasingly inadequate, view. In particular, it understates the growing role of food prices (up by 25 per cent over the past year and a half) in the squeeze on living standards that households – especially low- and middle-income households – are living through.

While energy prices have risen faster, food makes up a far larger share of the typical household’s consumption (13 versus 5 per cent in 2019-20). This, combined with food prices continuing to rise even as energy bills fall back, means that by this summer the average increase in food costs since 2019-20 (£1,000) will be larger than that for energy bills (around £900). And this is not just true at the average: this will also be the case for a majority of households (56 per cent or 16 million). The food price shock is about to overtake the energy price shock as the biggest threat to family finances.

This spotlight examines the contribution of food prices to today’s high inflation and the pressure on households’ living standards, before considering how families and government have responded to date.

Inflation is on the way down. Having plateaued close to 40-year highs since the Autumn, sharp falls are anticipated from next week: a near 2 percentage point reduction from March’s 10.1 per cent is expected in April, as Figure 1 shows. This marks the end of the peak energy costs part of this crisis, albeit without energy bills remotely returning to pre-crisis norms. This first significant fall is driven by April 2022’s large increase in the energy price cap dropping out of the annual inflation calculation. But next week will also see confirmation that energy prices will actually fall from July – the energy price cap is expected to be reduced from £2,500 to £2,063) – reflecting the retreat of wholesale energy prices, and contribute to inflation falling back further through 2023.’

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