Food and Drink Inflation Could Reach 4.9 Percent Next Year: Report

A customer shops for meat at a Sainsbury's supermarket in Walthamstow, east London, on Feb. 13, 2022. Tolga Akmen /AFP via Getty Images

Tax increases in the Autumn Budget could increase food and drink prices by up to 4.9 percent in 2025, a food and grocery market report suggests.

The Institute of Grocery Distribution (IGD) forecast revealed on Friday that policy changes announced by Chancellor Rachel Reeves in October will drive an increase in business costs.

These will take effect in three phases over the next year. The higher employment costs via employer National Insurance Contributions (NIC) and National Living Wage hikes will come into force from April.

In July, new costs from changes to border operations will take effect, while the advanced Extended Producer Responsibility for Packaging initiative will drive up the costs of managing packaging waste from October.

The changes make up about a third of inflation pressure in 2025, with the remainder being underlying inflation, the report said. According to the forecast, food inflation will outpace inflation for other items next year.

This comes as shop prices continued to decline in November but at a slower rate, compared to the previous month. The British Retail Consortium has warned that this slowdown “may signal the end of falling inflation.”

The IGD forecast estimated the range of food and drink inflation increase to be between 2.4 and 4.9 percent in 2025. The mid-case average has been estimated to be 3.4 percent, with inflation in 2026 set to reach 2.3 to 4.3 percent.

Absorbing Costs

British supermarkets and retail and hospitality bosses have warned that tax changes in the Budget will push up prices, passing extra costs on to consumers.

Sainsbury’s has reported that a rise in employer NIC will cost £140 million, even before wage uplifts are applied. Heads of Amazon, Aldi, Boots, Marks & Spencer, Next, and Primark have written to Reeves warning that the Budget will result in job losses and higher prices for shoppers.

Some 209 hospitality businesses have called the Budget measures “unsustainable” and “regressive” in their impact on lower earners. The CEO of UKHospitality, Kate Nicholls, said that businesses would be reluctantly forced to raise prices by 6–8 percent, fuelling inflation.

Reeves suggested that rather than lowering staff wages, businesses can “absorb” the employer NIC increases by accepting reduced profits or through efficiency gains.

However, in its forecast the IGD assumed that only 20 percent of higher labour costs can be absorbed by food and drink businesses.

Food Security

The food system supports 4.4 million jobs making it the largest private sector employer. The sector contributes 7 percent of GDP or £132 billion of gross value added, representing the largest manufacturing sector and accounting for over £24 billion of exports.

The IGD report highlighted the impact of geopolitical shifts, including the COVID-19 pandemic and the war in Ukraine, on trade security and resilience.

“If a shock event were to happen, worsening the landscape for UK food, the impact would be off a higher starting point, making any potential risk worse. Cost drivers are leaving the UK food system more exposed than before,” it said.

The forecast follows the latest food security report by the Department for Environment, Food, and Rural Affairs, published on Wednesday.

It found an increase in food insecurity among UK households, with the proportion of food-secure households dropping from 92 to 90 percent in the financial year ending in 2023.

Commenting on the findings, the Liberal Democrat environment and rural affairs spokesperson Tim Farron said, “These statistics are a stark reminder of just how important farming communities are to the rest of the country as producers of food and the stewards of our countryside.”

He said that both the Conservative and Labour governments have failed in their agricultural policies to incentivise the production of food, calling it “outrageous” and “foolish.”

The Budget included a policy change that limits inheritance tax relief for agricultural assets to £1 million, with any value above this threshold subject to a 20 percent tax rate, effective from April 2026.

The decision sparked backlash from the farming community, leading to large-scale protests and criticism from industry leaders.

However, the government maintains that the policy will affect only a small percentage of estates, asserting that it aims to address tax fairness and fund public services.

Downing Street has also committed to implementing measures aimed at bolstering food security. These include investing in sustainable agricultural practices, supporting local food production, and enhancing supply chain resilience.

Additionally, there is a focus on addressing household food insecurity through targeted social support programs.