Inflation latest: New data suggests soaring food and drink prices may have peaked

Food and drink manufacturers’ costs have fallen for the first time in more than seven years, a report today suggests, offering some crumbs of comfort over the future direction for inflation.

Releasing its latest UK Sector Tracker, Lloyds Bank said the food and drink sector posted an input cost reading of 49.4 for May – the first month it has registered below the 50 level that separates growth from contraction since April 2016. This was supported by a drop in commodity prices.

In total, four of the 14 sectors monitored by the tracker saw their input costs decrease last month, the highest number since June 2020, indicating some broadening in the easing of cost pressures across the UK economy. Seven other sectors also saw input costs continue to rise, but at a slower pace than the month before, bringing the total number of sectors with either decreasing costs or slowing cost rises to 11 – one more than April.

News of the decline in food and drink input costs comes after supermarket chain Morrisons slashed the price of 47 products by more than a quarter on average in the latest boost to hopes that wider UK food inflation may have passed its peak. The grocery giant said it was cutting price tags across all its 499 stores on items including mince, tomatoes and butter as well as cupboard staples such as squash and cereals.

Annabel Finlay, managing director, food, drink and leisure at Lloyds Bank Corporate & Institutional Banking, said: “This drop breaks sustained rises in production costs for food and drink manufacturers, which have been among the sharpest of any sector monitored by the tracker. If production costs continue to fall, whilst welcome, it will still take some time before we see the benefit in terms of shelf prices. This is, in part, due to the long-term nature of contracts between the manufacturers and retailers, as well as the broader segments of the production chain.”

Of the four potential drivers of cost inflation monitored by the bank’s tracker – material prices, shipping costs, energy costs and salaries – salary inflation is the “stickiest” element, remaining close to its peak level (2.28 times the long-run average, against a peak of 5.07 times recorded in May 2022). The figures indicate that robust competition for staff could keep salary inflation high in the months ahead. In May, the number of businesses citing difficulties retaining employees hit a record high (two times the long-run average).

Nikesh Sawjani, senior UK economist at Lloyds Bank Corporate & Institutional Banking, said: “Our report shows that more sectors experienced moderations in cost pressures in May which, if sustained and broadened out to other parts of the UK economy, would clearly be good news for the inflation outlook. These falls in costs mostly reflect reductions in shipping, raw materials and energy expenses, however, and our data suggests that cost pressures associated with wage bills remain strong as firms continue to compete for staff. Retention issues rose to a record high in May, indicating that competition for staff is still intense in some industries, suggesting that overall pay pressures may remain elevated for some time.”

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