The epicentre of the cost of living crisis will shortly move from energy bills to the weekly food shop, as energy prices fall back while food prices continue to rise, according to new Resolution Foundation analysis published last week.
The report, Food for thought, examines the contribution to inflation and effect on family finances of rising food prices, and the responses of households and government.
Rising energy bills have rightly been the centre of public debates and policy action over the past 18 months, as the cap on typical energy bills doubled from £1,277 to £2,500 between February and November 2022. This has driven the highest inflation seen in four decades (since 1982).
But data next Wednesday will show the first significant fall in inflation (expected to be almost 2 percentage points down from 10.1 per cent in March) as last year’s large rise in energy prices drops out of the annual inflation calculation. Confirmation from Ofgem next Thursday that energy prices will actually fall from July (the effective energy price cap is expected to be reduced from £2,500 to around £2,100) will contribute to further falls in inflation later this year.
In contrast, food price inflation reached an unexpected high of 19.1 per cent in March 2023 – its highest level in half a century – and food prices look likely to continue rising for some time to come.
As a result, food prices are set to contribute more to overall inflation than energy in the months ahead. Between March and September 2023, food prices are expected to contribute around 2 percentage points to inflation each month, while the contribution of energy prices is set to fall from 3 percentage points to less than 1.
Households, not just the Bank of England, are paying more attention to food prices, with more households now saying they are worried about food than energy prices (51 versus 48 per cent).
The Foundation’s analysis shows that this summer the food price shock is about to overtake the energy price shock as having the biggest impact on family finances.
While we have seen bigger energy price rises, food makes up a far larger share of the typical household’s consumption (13 versus 5 per cent pre-pandemic). This, combined with food prices continuing to rise even as energy bills fall back, means that by this summer the pressure from rising food bills since 2019-20 (averaging £1,000 per household) will be larger than that for energy (averaging around £900).
What rising food prices have in common with surging energy bills is that they pose a greater challenge to lower-income households, who spend a higher proportion of their income on food (15 per cent, compared 10 per cent for the highest-income households in 2019-20). As a result, the effective inflation rate for the poorest tenth of households was almost 50 per cent higher compared to the richest tenth of households in March.
Poorer households, who are more likely to already be purchasing the cheapest products, are also less able to respond to rising food prices by changing what they purchase. Instead, the risk is they simply eat less, with 61 per cent of the poorest fifth of households reporting cutting back on food and other essentials, compared to 35 per cent for the richest fifth.
Around one-in-five people also reported eating less or skipping meals, with this most common among those on the lowest incomes (27 per cent), receiving benefits (43 per cent), from certain ethnic minorities (30 per cent for black respondents), or with larger families (37 per cent).
The Foundation notes that this change in the nature of the cost of living crisis should remind policy makers that falling energy bills do not mark the end of households’ difficulties, and supports the Government’s approach of rebalancing support this year towards low- and middle-income households via April’s 10.1 per cent uprating of benefits and lump sum Cost of Living Payments.
However, the one-size-fits-all nature of those lump sum payments means they are not well suited to help some of those worst affected, in particular larger families.
Lalitha Try, Economist at the Resolution Foundation, said: “Everyone realises food prices are rising, but its less clear that the scale of the increases has been understood in Westminster.
“This summer the food price shock to family finances is set to overtake that from energy bills. What remains consistent is that those on low-to-middle incomes are worst affected.
“The cost of living crisis isn’t ending, it’s just entering a new phase.”