Food Inflation Could Rise Higher Under Prolonged Middle East Conflict

The UK market faces the risk of even higher food inflation this year – after jumping to 4.3% last month – if the war in the Middle East continues to disrupt logistics, and increases fuel, energy, and fertiliser costs.

Halting four consecutive months of decline, grocery inflation edged up to 4.3% in the four weeks to 22 February, according to new data from Worldpanel by Numerator. In January, grocery inflation reached a nine-month low of 4%, down from 4.7% in December.

Economists warn there could be worse news ahead for UK inflation and grocery bills if instability in the Middle East persists, considering oil and gas supplies have already risen sharply.

Lower oil and gas supplies from the Middle East could cause a “substantial spike” in inflation and a “sharp drop” in output from the eurozone, warned European Central Bank’s (ECB) chief economist, Philip Lane.

Speaking with the Financial Times, the ECB’s Lane said “directionally, a jump in energy prices puts upward pressure on inflation, especially in the near term” which would be “negative” for growth, including the UK. 

Global Supplies Face Disruption

The Strait of Hormuz on Iran’s southern border is a key shipping route for the world’s oil and gas supplies. 

Continued logistics disruption caused by ongoing tensions in the Gulf would affect global fuel and energy markets, pushing up operational costs across the food supply chain from food producers to distributors and retailers.

Equally, the conflict threatens to disrupt one of the world’s largest fertiliser production and shipping hubs which could raise crop input costs just as growers begin spring planting.

The ripple effect of lower supplies and higher costs could potentially lead to higher food prices in the UK.

Knock-On Effect For Food Prices 

A prolonged war could turn into a household budget story, Simon Geale, chief procurement officer at Proxima, told This is Money.

For consumers, this could mean increases to price of staples like bread, pasta, cereals, and vegetables such as potatoes. 

“Food price inflation has been relatively stable in the last 12 months; we would probably expect to see food inflation rates edge up by around 15 to 20% relative to the current level,” Geale said.

“So, rather than the 3.5 to 4% we see currently, something closer to 4.5% to 5%.” 

The impact for shoppers will not be immediate, added James Walton, chief economist at IGD. 

“Historically, rising energy prices have been reflected in rising food prices and we would expect an uptick in food prices for shoppers, with inflation likely peaking after around a year because of the lag in costs flowing through the supply chain,” Walton told This is Money. 

“However, the ultimate impact on prices for shoppers will depend on unknown variables such as the duration of conflict and damage to oil and gas facilities.”

Early Signs Of Pressure

The 4% February jump in food inflation already provides an early indicator of pricing pressure in the UK, with the Bank of England said to be watching food prices closely ahead of the official UK inflation data release on 25 March. 

“Households got some welcome relief in February as shop price inflation eased,” noted Helen Dickinson, Chief Executive of the BRC in a press statement. 

“Fierce competition between retailers kept price rises in check, with promotions across health, beauty and fashion,” she continued. "Falling global food costs also fed through, pushing food inflation down, with ambient food inflation dropping to its lowest level in four years.”  

While the direction of travel is promising, BRC’s Dickinson said prices are still rising, and many consumers remain under pressure.