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What’s driving the UK-Europe food inflation gap?

UK food inflation was roughly two percentage points higher than the Eurozone’s during the three months ending October, but why?

The UK food industry has, largely, blamed rising wage and national insurance contributions, as well as new packaging rules under the extended producer responsibility (EPR) scheme.

In November, the Food and Drink Federation (FDF), which represents food manufacturers in the UK, highlighted that production costs have risen 5% in the past 12 months, while food inflation has remained “stubbornly high” this year and is forecasted to remain elevated through 2026.

“With energy and ingredient costs stabilised, this is being driven by a tranche of regulatory pressures, including a £1.1 billion bill for the new EPR packaging tax and changes to national insurance contributions (NICs), which manufacturers have been left with no choice but to pass costs on to shoppers,” it warned.

Analysis suggests Britain’s ‘sweet tooth’ is to blame

But analysis suggests the gap has less to do with labour and packaging and more to do with different climate exposures and Britain’s “sweet tooth”.

Climate-related extreme weather events have been dismissed as an explanation for the food inflation gap because they are assumed to impact the UK and Europe equally, explained David Barmes in a piece published in late November.

“The evidence, however, points in a different direction,” added Barmes, policy fellow at Grantham Research Institute on Climate Change and the Environment, based at LSE in the UK.

Barmes, together with Swati Dhingra, member of the Bank of England’s Monetary Policy Committee, examined the granular inflation data and found that “a small number of products” are responsible for driving this UK-Europe area food inflation gap.

What’s more, “their price dynamics can be explained largely by a mix of global and domestic weather shocks”.

The experts identified three items that account for 42% of the gap – chocolate, other bakery products, and olive oil. The top 15 items – which also include soft drinks, crisps, ice-cream, butter, beef, and breakfast cereals – account for 87.5% of the UK’s divergence from the EU area.

“This concentration in a relatively small number of weather-affected products undermines broad-based explanations such as labour costs as the primary driver of the wedge,” Barmes wrote.

Cocoa and sugar supply chain disruption

Chocolate, which accounts for a fifth of the divergence in inflation between the two zones, reveals what is happening. Extreme weather has sent cocoa prices through the roof in the past two years.

However, this shock is hitting the UK harder, Barmes explained, because of how much of the nation’s spending goes on the sweet treat compared with Europe – 6% of the “food and non-alcoholic beverages basket” vs 2.3%.

Other treats like bakery products (biscuits and cakes), soft drinks, and confectionery also have higher inflation rates in the UK – and hold a higher share of that average food basket.

The experts homed in on sugar, too. Cane sugar has been disrupted by climate-driven extremes in Brazil, India, and Thailand, while UK sugar beet has faced historically hot and dry summers, and warmer winters that heightened problems with pests and diseases for crops. This has left a bitter taste in the UK where consumers tend to have a sweeter tooth.

It is not just sweets that are driving this gap, either, with olive oil and fresh/chilled vegetables among the products identified by Barmes and Dhingra.

The balance can swing the other way, too: coffee, which has been hit by various weather events, is the strongest “offset” to this food inflation gap, partly because it constitutes a bigger proportion of the Europe food basket.

“But at the moment, the UK is coming off worse on the whole,” Barmes wrote.

UK’s consumption patterns ‘more exposed to climate-stressed supply chains’

Christian Jaccarini, economist and senior analyst at the Energy and Climate Intelligence Unit think tank, said of the research: “The UK isn’t experiencing higher food inflation because of some uniquely expensive labour market – it’s mostly because our consumption patterns are more exposed to climate-stressed supply chains.

“Food production can’t hide from the weather, but by reducing our emissions to net zero and bringing balance to our climate, we can limit the impact of climate change on food prices.”

Business confidence among food and drink manufacturers fell further in Q3 this year, plummeting to –60% vs –40% in the previous quarter. This marked the sixth consecutive quarter of negative confidence, according to FDF.