Rising food inflation to apply pressure to industry margins
The Office for National Statistics' report for September, released last month, showed the lowest CPI measure since November 2009, with a 30 basis points (bps) fall in the UK's CPI rate to 2.2%. But this fall mainly due to a fall in household utility costs is expected to be short-lived, according to analysts.
The annual rate of food inflation continued its downward trend through September, after a brief tick upwards through August, falling back 20bps to 2.0%. The combined food and non-alcoholic beverages category reported a decline in the annual inflation rate to 2.0%, a 20bps nudge down.
Bread and cereals showed a surprising 40bp slowdown in the inflation rate from 1.5% to 1.1%, which follows a 240bps positive swing in August. However, given the poor wheat harvest, inflation in this category is expected to build through the last quarter.
Analysts at Shore Capital predicted the rise could be as high as the mid to high single-digit level. If not, they argued, serious pressure would be applied to already constrained industry margins.
Meat showed a modest increase in the inflation rate, ticking up 70bps to 2.3%, reversing the fall back in August. This is expected to increase as rising animal feed costs kick in. Meanwhile, milk, cheese and eggs continued deflation, but at a lower rate of -0.5% (from -1.5% in August); and vegetables showed a 110bps increase in the inflation rate to 2.8%. In both categories, Shore Capital predicted upward price pressure.
"Despite the fall back reported for September, we remain in no doubt that a further raft of inflation will be with us for Christmas and H1 [first half of] 2013," reported Shore Capital. "For the food retailers, the challenge is how the consumer responds, and whether it will lead to a further contraction in volumes.
"Unfortunately, volumes will be forced to take the strain."
