Food price inflation could force Bank of England to pause rate cuts
Food prices have been one of the big drivers of 2025’s inflation, accounting for roughly a quarter of the rise in headline inflation this year.
Looking ahead, food inflation is expected to continue to rise over the course of this year, driving headline inflation to 4% by September. With food inflation having an outsized impact on households’ inflation expectations, the Monetary Policy Committee (MPC) could find it hard to justify another rate cut in Q4, say analysts at consulting firm RSM.
Steeper prices
Food and drink inflation rose to 4.9% in July, having risen almost 3 percentage points so far this year. In fact, food inflation is responsible for around 25% of the rise in UK inflation since December, adding to April’s rise from regulated price hikes.
The main reason for the sharp increase in food prices is higher global wholesale prices. These eventually find their way into consumer prices. The impact of rising wholesale prices is particularly evident in the key drivers of recent food price increases – such as for beef and cocoa – where supply constraints due to issues like poor weather conditions have been pushing up prices globally.
“April’s increase in employer National Insurance Contributions (NICs) is compounding food price inflation in the headline data,” RSM said.
“Supermarkets and food manufacturers were particularly hard-hit by the rise in employment costs. Both sectors also employ many staff at the National Living Wage (NLW) and are one reason why pay growth in retail (7.8%) and food manufacturing (6.5%) is so strong. As a result, these firms have probably relied on hiking prices to protect margins.”
It noted that the fact that food price inflation in the UK is over 1.5 percentage points higher than in the US and the eurozone suggests there is more at play than just rising commodity prices.
Impact on the MPC
Rising food prices are clearly a growing concern for the more hawkish members of the MPC. Food prices are crucial to households’ perceptions of inflation because everyone notices the rising cost of essentials in the weekly shop.
This is why the hawks on the MPC noted the “disinflationary process had slowed and the risk of inflation expectations feeding through to second-round effects had risen” in their August meeting. An example of a second-round effect is that households bargain for bigger pay rises because they feel inflation is higher and, crucially, will stay higher in the medium term thanks to rising food prices.
This can push up inflation and increase costs for firms. In turn, firms will be more aggressive in passing on big price increases to consumers, RSM said.
“What’s more, survey data already suggests households’ inflation expectations are well above levels consistent with 2% inflation. This gives the MPC little wiggle room if households’ perceptions of inflation continue to increase. It may then judge the risks of those second-round effects materialising to be too high.
“Ultimately, food inflation will continue to rise over the rest of the year. If this further heightens inflation expectations, then the MPC is likely to choose to skip a fourth rate cut this year and instead wait until the spring.”
