Food inflation eases but input costs are volatile
The Office for National Statistics (ONS) reported that the Consumer Price Index (CPI) had nudged down by 20 basis points (bps) to 5% in October. On a retail price index basis, this represented a 20bps reduction to 5.4%.
"The largest downward pressures to the change in CPI annual inflation between September and October came from falls in the cost of food (due to significant and widespread discounting by supermarkets and good harvests for certain produce), air fares and petrol," said the ONS.
Food inflation alone had fallen more significantly by 140bps to 4.6%, claimed Shore Capital, but the reduction was not evident across all of the categories. Good fruit harvests resulted in some of the biggest falls, to just 0.9% the lowest rate since April. Vegetable inflation has fallen steadily to 2.3%, from a 5.4% peak in June.
Shore Capital suggested that around half of the 140bps reduction in food inflation could be attributed to the deflationary impact of retailer price discounting activities, most notably Tesco's 'The Big price Drop' and the subsequent responses of the other multiples.
James Walton, chief economist for grocery think tank IGD, said: "Much of [the reduction of CPI in food] may be due to price falls on global markets, which reflect economic uncertainty and an easing of global demand."
Walton added: "The UK imports about one third of all food consumed. Recent studies by the Department for Environment, Food and Rural Affairs show that global markets play, by far, the biggest part in determining the prices paid by UK shoppers, although the interplay between global and local markets is very complex."
Shore Capital analysts Darren Shirley and Clive Black said: "The question now arising is whether consumers respond to the fall back in the inflation rate also evident at the petrol pump with a recovery in food volumes, which we believe have been in decline across the industry by around 12% for much of 2011."
But they predicted that the much anticipated Christmas trading period would prove "okay" for the food industry.
The ONS reported a reduction in bread and cereals inflation to 6.2% the lowest rate since April. With wheat harvests favourable in 2011, Shore Capital said it expected further downward pressure in forthcoming months.
Meat inflation went down to 5.8%. However, this contrasted with an increase in fish inflation to 10%. At the same time, milk, cheese and eggs inflation eased to 2.6% the lowest rate since March.
But oils and fats inflation remains stubbornly high at 10.5%, unchanged from September, reported Shore Capital. And sugar, chocolate and confectionery ticked up 40bps to 8.5%. Food products increased by 70bps to 2.9%.
Jonathan Bye, md for soft drinks firm Vimto said: "One of the big areas of concern for us is the big rise in input costs that we are all facing. Sugar has gone up about 70% in past two years.
"This level of volatility of commodity increases is very difficult for any business. But when you are a smaller firm and you might be relying on only one brand and possibly only one of the retailers, it is absolutely critical that you are able to recover those costs."
