Comfort food eases doom and gloom of economy

Economists expect food prices could be cut across the board by the end of next year thanks to an increase in global wheat supplies. But the cost of some foods is expected to rise again after that, as demand from emerging markets increases.

The Office for National Statistics reported yesterday that the consumer price index (CPI) rate of inflation had gone up from 4.2 to 4.4 per cent last month. The retail price index (RPI), which includes housing costs, was unchanged at 5 per cent.

The Centre for Economics and Business Research (CEBR), an independent economics consultancy, forecast a "dramatic turnaround" in retail food price inflation, from 5.7 per cent in April-June this year to minus 1.8 per cent in August-October next year.

It said food price inflation had already eased from to 6.2 per cent in July against 6.9 per cent the previous month.

The CEBR said its forecast would provide a twin boost, to shoppers and for interest rates.

Chief executive Douglas Williams said: "There is a double benefit to the economy as a whole from the food price inflation turnaround. Real disposable incomes will be lifted by falling food prices, which will leave more spending power in the hands of consumers.

"And the Bank of England's monetary policy committee will be more relaxed about monetary expansion and hence allow lower interest rates or more quantitative easing, which should also help stimulate economic growth."

The CEBR said poor wheat harvests last year in the three biggest producing countries - the United States, Russia and Canada - had sent prices soaring.

However, the high prices led to increased areas of wheat being planted this year, which, accompanied by good weather, boosted supplies and will push down prices, the CEBR said.

It added: "Given normal weather patterns, we expect the higher supply to affect a fall in world food prices in mid-2012.

"We expect these falls to be passed on to the consumer as competition between supermarkets remains healthy."

Shehan Mohamed, a CEBR economist and main author of the report, said: "The sharp turn-around in food prices is expected to last until the end of next year, which will take the headline inflation rate slightly below target over the medium term.

"Beyond 2012, we expect growing demand from emerging markets to elevate some food product prices - particularly for meat and dairy products. However, increased yields from the exploitation of more intensive farming methods will prevent runaway prices over the coming years."

The CEBR said the rampant growth in global food prices in the second half of last year, of more than one third, came to a virtual halt in the first half of 2011 - at just 1.3 per cent.

Scotsman food columnist Stephen Jardine, director of public relations firm Taste Communications, said the forecasts would be welcomed by consumers and producers alike.He said: "These latest figures are at least some good news for hard-pressed families.

"With the overall rate still rising and the price of clothing particularly on the way up, an easing in food price inflation will be a relief because it forms such a big part of the family budget. For Scottish food producers, it is also a cause for optimism. The rising cost of raw ingredients has been a major factor in the big increases we've seen in the costs of food production.

"That is now set to settle, and continued competition in the supermarkets should see lower prices being passed on to consumers this autumn."

However, analysts and retail groups were more sceptical about the CEBR forecasts.

Richard Dodd, a spokesman for the Scottish Retail Consortium, said: "It is certainly clear that food inflation is already slowing, so we are on a downward trend already. It would be great if commodity (raw material] prices fall to the extent that is being predicted - let's hope they are right.If that happens, the shop price of food will be pushed down. However, this may be overly optimistic. A lot of analysts are expecting grain prices to stay high at least until the end of this year, and pressure on prices will remain.

"The price of wheat is also not the only factor involved, with energy costs that affect manufacturing and transport still high."

Alan Bullion, head analyst at food and commodities information service Informa Agra, described the CEBR report as "a bit bullish".

He said: "They are a bit optimistic about food prices falling next year, since commodity prices remain high.

"It is true that wheat prices have eased slightly, but they will climb on forecasts of increased demand.

"If crude oil prices come down, that might ease the situation, however, I do not think supermarket prices will come down particularly.

"The World Bank has also said it expects prices to remain volatile and food prices to remain relatively high."

The increase in the CPI rate of inflation will apply pressure on the Bank of England to increase interest rates in a bid to curb soaring inflation.

However, the Bank is grappling with a fragile recovery in the UK, which saw its economy grow by only 0.2 per cent between April and June.

The Bank's governor, Sir Mervyn King, is required to write a letter to the Chancellor when inflation has been above the Bank's 2 per cent target for three months. Yesterday's correspondence was his seventh successive letter and his 12th in total.

Commenting on figures, Deputy Prime Minister Nick Clegg said he was "acutely aware" living costs were hitting a lot of people very hard. He said it was a "tough time" for many people and the news would be "deeply unwelcome" for them.