The Knowledge Bank: Inputs, Inflation, Costs

Those who have been following our reporting will note a welcome change this month: forecasts

Just a few months ago it seemed impossible for analysts to foresee which way markets would go. But as a clearer picture emerges of inflation drivers, they’re starting to make more predictions around market movements for this year and next.

While there’s no clear view yet of 2023 the fact analysts now feel there is evidence enough to make some forecasts is timely news for the food and drink sector – especially procurement personnel, who are under significant pressure to make the right calls on pricing and hedging.

Inflation is continuing to rise globally and will likely remain high for at least the rest of the year. In the UK, we hit the highest inflation rate since 1982 (9.4%, in June) with food prices now being a primary contributing factor alongside energy and fuel costs.

Given this increase, it’s not surprising that 40% of Britons say inflation has eclipsed climate change as the most important issue today. But the data indicates that the year-on-year value decline in retail sales still has more to do with post-lockdown behaviour than inflation. Of course, we can’t ignore the ongoing dairy story: the mainstream media has been covering the soaring cost of cheese, butter and milk for weeks. But despite the sensational headlines, lavishly illustrated by pictures of cheddar with anti-theft tags on, shoppers are for now absorbing most of the rising costs of their grocery basics.

There is a real sense that the summer of ’22 is both a welcome relief from the pandemic confinements and at the same time a last hurrah before the fiscal constraints of winter. People are taking advantage of warm weather and relaxed rules around Covid-19 to enjoy their summer holidays, eating and drinking out more and travelling overseas. This behaviour will almost certainly change as autumn arrives.

Watchers of the UK foodservice market are issuing financial health warnings for the sector and with only two in five hospitality businesses currently reporting profitability, food and drink producers will need to have a clear focus on which parts of the market can still offer them good returns. For grocery, expect to see producers and retailers replicate the out-of-home experience more cheaply as people eat out less and have less money to spend, but still seek to treat themselves.

A little of the gloom around pressures on the supply chain, particularly around packaging inputs and high transport costs was lifted this month with the announcement of the first direct container service connecting Chinese ports to Scotland. It should nearly halve the transit time for moving products between the countries, which will hopefully lower associated freight costs.

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