Greggs manufacture

The UK’s food and drink manufacturing sector is starting to see production costs fall

A drop in food and manufacturing production costs in May has raised hopes that grocery inflation may start to ease.

Production costs fell for the first time since April 2016, according to the Lloyds Bank UK Sector Tracker. The food and drink manufacturing industry posted 49.4 on the tracker’s table of input costs, the first time it has registered below the 50.0 mark – which represents contraction – in seven years.

The data showed that inflationary pressures across materials prices, shipping costs and energy costs have all softened after three years of consistent cost hikes driven by Covid, Brexit and the Ukraine conflict.

Meanwhile, the latest Make UK/BDO survey also showed the UK manufacturing industry has experienced continued post-pandemic growth in the second quarter of 2023.

The research estimates the industry will shrink by 0.3% in 2023, which is an improvement on the Q1 prediction of a –3.3% contraction and the -4.4% forecast made at the end of last year.

The food and drink sector also received an upward revision to its previous expected output growth forecast for 2023 – a –2.4% estimate last quarter has now turned into 0.3% growth, which is a “marginally better forecast that the overall manufacturing average which is expected to decline by –0.9% in 2023”, according to Make UK researchers.

The sector is expected to register 0.9% growth in 2024.

The United Nations’ monthly food prices index has also declined by 2.6% in May, mainly driven by falls in the price of commodities like cereals, vegetable oils and dairy. And the UK’s food inflation levels have also slowed for the second consecutive month, according to the latest ONS data.

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However, industry experts are still cautious about what an easing in inflationary pressures will actually mean for retail prices in the short term.

“Manufacturers are seeing a gradually improving picture but the word ‘gradually’ is doing a lot of heavy lifting,” said James Brougham, senior economist at Make UK.

BDO national head of manufacturing Richard Austin also warned the British manufacturing sector still faced “longer-term systemic challenges”.

Supply chain pressures are an endemic issue for the businesses we talk to, particularly medium-sized firms. They are facing continued disruption and increased costs, at home and abroad, with many choosing to onshore operations but facing major barriers in doing so.

“These issues cannot be overlooked by policymakers or we run the risk of tepid-at-best growth for UK manufacturing while neighbouring countries outpace us.”

Figures showed that rising staff pay costs could continue to support inflation for months to come.

Lloyds experts said that while an ease in production costs was “good news”, it would still take some time before shoppers saw the benefit in terms of shelf prices.