Consumers will be winners in supermarkets' competition

Published on Monday 28 April 2008 10:46

Market economics will keep a lid on food prices, says Fiona Moriarty

IS the era of "cheap food" over? The recent upsurge in food price inflation certainly suggests that something significant is happening

But the media coverage to date hasn't really recognised that "cheapness", like "fairness", is a relative concept. Whether food is cheap depends on who you are and where you sit. Chattering-class aficionados can afford to be contemptuous of supermarket price competition, value lines and the like. But a low-income family will welcome a shopping trolley they can afford. In any event, competition law looks benignly on lower prices and more choice for consumers delivered by a free market.

The real question is how far the current food inflation will offset the disinflationary effects of retail competition. The argument that we have entered a more inflationary era rests on these propositions:

&#149 That the year-on-year doubling in the price of wheat is being driven by the global market, reflecting a long-term structural increase in demand.

&#149 That climate change is already having an adverse impact on crop yields round the world, making imports more expensive.

&#149 That many UK farmers need higher prices for their output because otherwise the increase in animal feed costs will put more of them out of business and increase our dependency on uncertain foreign supplies.

But this isn't the whole story. Supermarkets will continue to compete on price because most consumers will still be looking for value for money.

So while individual elements within a typical shopping trolley (bread, milk) have gone up sharply, others may well stay put or even come down. Indeed, those of us who believe interest rates are already too high and are worried about the potential effect on the retail market of rising mortgage costs are certainly hoping that any on-going food inflation doesn't hold back the hoped-for reduction in the Consumer Price Index to the Bank's two per cent target.

The strength of competition in the grocery market means that inflation in primary products may to some extent be absorbed by processors, manufacturers and retailers, reducing the overall impact on consumers. And if higher inflation is indeed going to be with us in the longer term, it may well accelerate the pace of concentration in the supply chain. Larger but fewer farms and processing plants means greater scale economies and lower unit costs.

The reality is that these are short-term price rises. Supermarket competition, efficiencies, and economies of scale have reduced the price of a typical trolley load of goods by 15 per cent in real terms since the early 90s. Claims of dramatic increases in food prices are alarmist and unsupported by the evidence. Competition between food retailers is continuing to keep prices down, with retailers absorbing much of the impact of increasing costs themselves.

&#149 Fiona Moriarty is director of the Scottish Retail Consortium