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Opinion: The utter mess of rocketing food inflation

The pledge Rishi Sunak made in January to cut headline inflation “in half by the end of the year” was seen by some as cynical – because that fall looked inevitable.

Indeed, gas on European wholesale markets surged from around €70 (£61.90) per megawatt hour before Putin’s invasion to €225 in March, peaking at almost €350 last summer and still at €144 as recently as December.


But as Western Europe has diversified away from Russia, stockpiling gas from the US and Qatar while switching to other fuels, prices have tumbled – with gas now trading at around €41, well below pre-invasion levels.


While gas and electricity bills are yet to tumble for millions of households, that will soon change. The UK’s energy market remains a mess, with providers often giving consumers a raw deal. But domestic bills are still set to drop some 20pc in July, in a partial reflection of wholesale prices.


Commercial bills are different. The Government has just curtailed the support scheme for all but the most energy intensive firms, meaning some corporate bills will go up. And, as I mentioned last week, too many companies are now “locked in” to contracts that they were “forced” to sign when wholesale prices were sky-high.


Having said that, while high energy costs will continue to blight some businesses, particularly manufacturers, pubs and restaurants, the typical household should soon be paying under £2,000 a year for combined gas and electricity for the first time in nine months. And that will help ease inflation.


As energy prices fall, global supply chains are also finally emerging from lockdown chaos. Those notorious semiconductor shortages are easing and freight shipping rates are now close to pre-Covid levels. That means fewer inflationary pressures in the pipeline. Producer Input Inflation (PPI) was a whopping 24.5pc last June, says the ONS, but in February it had fallen to 12.7pc – still elevated, but down by almost a half. Wednesday’s data could include PPI dropping into single digits.


Despite all that, shoppers and the hospitality industry still face rocketing food prices. Surveys suggest food inflation is actually accelerating, with prices up 16.7pc during the year to January, 17.1pc the following month and 17.5pc in March, according to the consultancy Kantar. This worrying trend could be officially confirmed by the ONS next week.


So there’s a danger that, while broader inflationary pressures abate, the cost of food – possibly the most politically sensitive price metric of all – stubbornly keeps rising. And that’s why Tesco’s move to lower the price of milk is so symbolically important.


Why? Because the rocketing food price inflation we’ve continued to see in the shops over recent months runs entirely contrary to what’s been happening on global and national wholesale food markets.


According to the UN Food and Agriculture Organisation (FAO) index, global food prices fell in March for the twelfth successive month – and are now some 10pc below where they were before the Russia-Ukraine conflict.


While shoppers have shouldered accelerating food bills, wholesale and even farm gate prices are far from elevated. The cost of food processing and packaging has clearly risen, given higher wages and energy bills, to some extent justifying food price inflation.


But the contrast between downward wholesale food prices and upward retail prices over recent months is very stark indeed. While they compete to some extent, powerful supermarkets – and almost everyone else along the food supply chain – are in a far better position to pass on cost increases, and retain wide margins, than hard-pressed farmers.


There’s so much economic gloom around – and that’s at least partly the media’s fault. Consider last week’s focus on new International Monetary Fund forecasts suggesting the UK would be the slowest growing G7 economy in 2023.


There was much less emphasis on Britain’s growth performance in 2022, which was actually the fastest in the G7 – a fact, rather than a forecast. Or the reality that 25 of the IMF’s previous 28 predictions of UK growth have turned out to be too pessimistic.


If inflation is finally tamed, putting lower interest rates on the horizon, the economic mood will palpably lift – as long as high food prices don’t continue to spoil the party. These prices are nothing to do with Brexit – eurozone food price inflation is almost identical to that in the UK.


But eye-watering food prices may be at least partly explained by anti-competitive practices along our vital food supply chain. And unless more prices drop for supermarket shoppers soon, that contention will attract more scrutiny.


About the Author: Liam Halligan is an award-winning economist, journalist, broadcaster and author. He is currently the Economics and Business Editor of GB News and co-hosts the Telegraph’s Planet Normal podcast.


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