Alarmist headlines and forecasts about food inflation fail to reflect factors that will keep the overall cost of a basket in check
Is the era of "cheap food" over? The recent upsurge in food price inflation certainly suggests that something significant is happening out in the marketplace. But the media coverage to date hasn't really recognised that "cheapness", like "fairness", is a relative concept. Whether food is cheap depends on who you are and where you sit income-wise.
The real question is how far the current food inflation will offset the otherwise disinflationary effects of retail competition. The argument that we have entered a more inflationary era rests on the following propositions:
First, that the year-on-year doubling in the price of wheat is being driven by the global market, reflecting a long-term structural increase in demand.
Second, climate change is already having an adverse impact on global crop yields, making our imports more expensive. Third, many UK farmers need higher prices for their output because otherwise the increase in animal feed costs will put more of them out of business and increase our dependency on uncertain foreign supplies.
But this isn't the whole story. Supermarkets will continue to compete on price because most consumers will still be looking for value for money, especially at a time when disposable incomes are being squeezed by mortgage rates and retail sales generally are slipping into the low annual growth rates expected in a mature market. So while the price of individual elements in a typical shopping trolley (bread, milk) have gone up sharply, others may well stay put or come down. Indeed, those of us who believe interest rates are already too high and are worried about the potential effect on the retail market of rising mortgage costs are hoping any ongoing food inflation doesn't hold back the hoped-for reduction in CPI to the Bank's 2% target.
The strength of competition in grocery means inflation in primary products may to some extent be absorbed by processors, manufacturers and retailers . And if higher inflation is indeed going to be with us in the longer term, it may well accelerate the pace of concentration in the supply chain. Larger but fewer farms and processing plants means greater scale economies and lower unit costs, which should enable operators to cope with higher commodity prices and help them penetrate global markets. That will be as big a challenge for the OFT and its insular view of markets as it will be for UK producers with their aversion to collective organisation.n
Kevin Hawkins, director general of the British Retail Consortium