Where’s the Beef: Grocery Bill Keeps Rising
Where’s the Beef: Grocery Bill Keeps Rising
Despite a widespread belief that inflation is under control, the UK's rate is on the rise again, largely due to persistent food inflation. The key drivers are long-term, systemic issues that won't disappear overnight.
Whilst lower than the double-digit inflation rates of 2022-23, the UK's inflation rate is starting to creep back up. After peaking at 11.1% in late 2022 before briefly dipping below the Bank of England's 2% target last year, the Consumer Price Index (CPI) is now at 3.8%. The primary driver of this renewed pressure is food inflation, which has seen prices rise by over 36% since the start of 2020 and is up 4.9% from this time last year. While initially fuelled by the COVID-19 pandemic, a combination of climate change, geopolitical events, and rising production costs has sustained these higher-than-average price increases in the food sector.
Food inflation has started to pick up in the last 12 months following a surge during the country’s recovery from COVID.
Source: Artorius, Bloomberg
Climate Change and Extreme Weather
Climate change is a significant and growing contributor to food inflation. Extreme weather events like droughts, floods, and heatwaves are becoming more frequent and severe, directly impacting agricultural yields and production. For example, recent heatwaves in West Africa have devastated cocoa harvests, causing a massive surge in the global price of chocolate. Similarly, droughts in Spain have impacted olive oil production, and heat in Europe has affected harvests of cereals and vegetables. These events create a classic issue of supply and demand: when crop yields are reduced, the available supply shrinks, and prices inevitably rise.
Geopolitical Conflicts and Supply Chain Disruptions
Geopolitical tensions continue to disrupt global food supply chains. The war in Ukraine, a major exporter of wheat, maize, and sunflower oil, severely impacted global grain supplies. This has led to price increases and heightened food insecurity, especially in countries that rely heavily on these imports. Russia's blockade of Ukrainian ports and its own restrictions on grain and fertiliser exports have also exacerbated the problem. These disruptions have had a lasting ripple effect, contributing to continued price volatility and shortages long after the initial shock.
High Labour and Production Costs
The cost of producing and distributing food has also risen significantly. Labour costs, driven by increases in the minimum wage and National Insurance contributions, have been a major factor. For many agricultural businesses and food retailers, labour makes up a substantial portion of their total costs, and these increases are often passed on to consumers. Additionally, high energy prices for fuel and electricity, along with the rising cost of other agricultural inputs like fertilisers, have further pushed up the price of food from farm to fork.
These factors have led to a large spread of price rises within the inflation basket of food itself, with many price rises significantly higher than the overall rate.
Source: Artorius, Bloomberg
Looking ahead, households face a potential new headwind: potential tax rises. While specific details of the Autumn Budget remain to be seen, speculation is mounting about new levies to address a significant deficit in public finances. While the government has pledged not to raise income tax, National Insurance, or VAT, other tax hikes are being considered. Historically when businesses face increased costs from new taxes or other government policies, they often pass at least some of them on to consumers. This could add further pressure to already high food prices.
In essence, the factors driving food inflation aren’t just a fleeting problem; it’s a new reality. Combined with potential fiscal tightening in the upcoming Budget, food prices could remain stubbornly high for the foreseeable future, making it even more crucial for households to budget carefully.
Away from inflation
On the 27th August, the last of the major US companies, Nvidia reported its second-quarter earnings, which, at first glance, were a resounding success. The company beat Wall Street's expectations for both revenue and profit, continuing its trend of explosive growth driven by the AI boom. Revenue surged to a record $46.7 billion, a 56% increase from a year ago.
However, the share price still dropped in the days since. This seemingly contradictory reaction highlights a key theme of the current earnings season: investor expectations are incredibly high, especially for AI-related companies. While Nvidia's overall numbers were strong, its data centre revenue, the core of its AI business, grew but just missed analysts' lofty forecasts. This shortfall, coupled with ongoing concerns about a potential slowdown in China due to export restrictions, has been enough to add concern to investors over recent days. However, the main takeaway from this earnings season is that earnings have remained, on the whole, robust.
Josh Young de Ferrer
Portfolio Manager
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