This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
Energy inflation is already hitting us, as you can see at the pumps. Petrol is up 24p a litre since the Iran war began and diesel is up 50p. Food inflation is still to come.
That’s because there are different timescales for a supply shock, such as we are having now, to work its way through the economic system. So the increase in the price of crude oil has had an almost immediate impact on fuel at the pumps. But the effect on the cost of other things will take months to come through, so that inflation as a whole will carry on rising through the summer and autumn – and maybe beyond.
The next big blow will be food. The Bank of England reckons that food price inflation could rise to between 6 and 7 per cent by the end of the year. It could be much higher. For example, data aggregator Helios AI calculates that global prices could be 12 to 18 per cent higher by the end of the year, and then climb even further in the first half of 2027. The argument is that the impact of the war comes in three stages.
The first, which is already happening, is the increase in transport and fertiliser costs. Natural gas is a key feedstock for producing nitrogen-based fertilisers, and there is already a big increase in its price and some shortages of availability. The second, which will come through later this year, will be when crops planted this spring have lower yields because of the shortages and higher cost of fertiliser. And the third stage arrives because some food-producing countries are likely to restrict exports, as they did in 2022 for wheat, beef and palm oil. That will further increase prices.
It is easy to be alarmist, and scare stories catch the headlines. But it does seem realistic to expect both that food prices will rise faster than inflation as a whole, and that they will be more sticky; it will take longer for them to come down after the war ends. That’s an obvious economic problem in the sense that money spent on food is money not available to buy other things, but it is also a social concern. The issue here is that poorer people – and poorer countries – spend a higher proportion of their income on food than richer ones.
Here in the UK families spend on average about 11 per cent of their income on food and non-alcoholic drink in the home, according to the Office for National Statistics. However, for the poorest fifth of households, that figure is over 14 per cent. Other sources calculate the numbers slightly differently, for example excluding non-alcoholic drink, and the UK average comes out a bit lower at 9 per cent. There is the further complication that an increasing proportion of meals eaten in the home are prepared by restaurants and delivered by courier. But the fundamental point stands that rich countries spend proportionately less on food than poor ones. Nigeria is an extreme example, with 56 per cent of family income spent on food, and some estimates putting it higher still. The poorer you are the harder you will be hit.
So what’s to be done? There is already huge pressure on the Government to try to hold down food prices. It has said that it will scrap tariffs on a raft of imported foods, including pasta, juices, tuna, oranges and peaches. The British Retail Consortium wants it to go much further, arguing that government policies have already increased food costs quite apart from the impact of the war.
On energy it wants Labour to remove the renewables obligation and feed-in tariff costs. It also wants a delay to the implementation of the nutrient profiling model, which will mean that food manufacturers have to reformulate their products, and also a review of the new packaging levies, including the plastic packaging tax.
We’ll see what the Government comes up with. But to be realistic, it’s hard to see it making a material difference to food prices. So what can we do? Economists should beware giving practical advice but here are five basics.
One is to remember that our grandparents used to eat food when it was in season. You can get strawberries at Christmas, but if they have to be flown in from Africa, you will be paying for the doubling of the cost of aircraft fuel. It makes sense to adjust our diet to what’s in season, because what’s plentiful is what’s cheap.
A second basic is that it is much cheaper to cook your own food than pay someone else to do it and then deliver it to your door. You are paying for someone else’s rates, their national insurance – and their profit.
Three, vegetables are cheaper than meat or fish. That does not mean going vegan: just rebalancing the ratio between the two. Four, cheap cuts of meat and fish can produce memorable meals. Think Irish stew rather than fillet steak, mackerel rather than Dover sole.
Finally, there are always deals. Supermarkets will be under greater financial pressure of course, but also under social pressure to be seen to be doing the right thing. So they will find ways of holding down the price of the basics, and try to make their money on the fancy lines.
None of this is going to be easy. Eventually let’s hope food prices come back down. Meanwhile we should accept there may well be less choice, but be thankful that we have an efficient food distribution system. And, let’s be frank, two cut-price German supermarkets in Aldi and Lidl to force the home team to lift their game.
Need to know
There is an inevitable tension in all retailing between choice and price. As you might imagine, there is sizeable industry examining why people buy things, how much they are prepared to pay, whether they really want choice or do they simply say they do – and on it goes.
At the very top end of food and drink retailing – and particularly drink – there is the massive premium on exclusivity. That’s bottles of Scotch available £1,000 a pop, or auction results where a single bottle has gone for upwards of £200,000.
But in our regular supermarkets the premium is more rational. It’s about Waitrose being consistently the most expensive one, with Lidl and Aldi fighting it out at the bottom. However, on their own terms the two German groups do supply quality; what they don’t do is offer choice.
Over in the US it’s different. Choice is universal; quality, however, is ho-hum. But then, space is cheap and energy is cheap, so it is easier to offer a massive variety of lines, and most consumers seem to care less about the quality of what’s on offer – or maybe define quality differently from Europeans.
There is a fascinating question about the transferability of retail skills and experience across national borders. UK efforts to succeed in America have almost always failed: Marks & Spencer tried; Tesco tried; Sainsbury tried. All failed, with Tesco losing more than £1bn on the venture.
It doesn’t really work the other way either. The Whole Foods experience in the UK has been salutary, for the US group has consistently failed to make a profit, with losses of more than £200m.
The shining exception is those two German enterprises. They arrived in the UK in the early 1990s and now have 18 per cent of the grocery market between them. They tussle between each other to be the cheapest, but they are not simply competing on price. They have found that choice doesn’t really matter to many shoppers as long as they can offer quality, and not offering choice means they can streamline their entire network. This leads to two fascinating questions: will the forthcoming surge in food prices give them a further edge? And will this surge also reduce shoppers’ interest in choice more generally?
I expect the answer to the first is yes. As for the second, I really don’t know – though I am fairly sure that Waitrose, at the other end of the market, will come out well from the squeeze on incomes. The top end is more secure than the middle.