Households have felt persistent pressure on their everyday costs, but food price inflation has been particularly pernicious in recent months.

The Office for National Statistics (ONS) reported year-on-year food price increases of 19.1% in March 2023 based on the consumer price index (CPI) measure. This was an increase from 18% the month before. Consumer data provider BRC-NielsonIQ saw its shop price index show 17.8% price increases year-on-year in April – the highest increase seen in 45 years.

With the headline rate of 10.1% CPI inflation, should we be concerned about inflation persisting for longer, and thus bigger interest rate hikes?

Why food prices are soaring

Food prices are just one aspect of a wider basket of goods and services the ONS measures in order to gauge the general rise in the cost of living for households. Food price rises are particularly high because they suffer from the secondary effects of the kind of inflation the UK, and most of Europe,  is suffering. The current high level of inflation is primarily stoked by an energy crisis, which in turn is caused by returning demand post-pandemic and then the invasion of Ukraine by Russia.

Energy prices are a painful place to see rapid rises because they essentially affect everything else. From factory lines to food processing and just about anything else you can think of, households and businesses all need energy to function. If the price of energy rises, it holds that the prices of things we make should rise to cover that cost. Food is especially volatile because it has even more external factors that can affect it, plus major food production supplies, such as from Ukraine, are under extreme and unusual pressure.

Food prices are so volatile most countries produce ‘core inflation’ statistics that exclude food prices. CPI core inflation is currently at 6.2%.

Interest rates

With food inflation so persistently high, this begs the question whether the Bank of England will meet the challenge with more aggressive rate hikes in order to bring prices down. However, precisely because the bank knows how volatile food prices can be, it will be cautious about acting upon those figures alone.

Energy prices are starting to come down in earnest, with wholesale gas prices now below the level they were at before the invasion of Ukraine in February 2022 and at the lowest level since December 2021. Plus, other global macroeconomic effects such as an unusually strong dollar are busy unwinding. A strong dollar tends to increase inflation pressure because many commodities are traded globally priced in dollars.

If the pound falls versus the dollar, then those commodities become more expensive for the country to acquire and vice versa.  Since reaching a low of £1:$1.07 at the end of September last year, the pound has steadily gained ground and is now trading around $1.26.

All that said, the Bank of England will be cautious about ending rate hikes, or even starting cuts, until it is sure inflation is coming back to earth in a meaningful way.

Where does this leave me and my money?

Inflation is a critical metric to watch when it comes to long-term wealth management. The level of inflation has a direct impact on where central banks go with interest rates and this in turn has profound implications in everything from government debt and taxation levels to market performance and cash value erosion. Over time the figures might seem irrelevant but the only way to keep ahead of inflation and prepare for major financial and tax-based changes that will affect your portfolio and lifetime wealth is careful management.

If you would like to discuss inflation, interest rates and the general outlook for the rest of 2023 and the implications for your wealth, don’t hesitate to get in touch.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2023.