FDF uprates food inflation forecast to at least 9% by the end of 2026

The Food and Drink Federation (FDF), which represents the UK’s 12,000 food and drink manufacturers, has revised its food inflation forecast in light of recent geopolitical events.

FDF previously forecast that the rate of food inflation would gradually ease in 2026, ending the year around 3%. However, given the effective closure of the Strait of Hormuz and impact on oil and gas facilities in the Middle East due to the conflict in Iran, FDF has uprated the forecast. It now anticipates that food inflation will reach at least 9% by the end of the year.

Given the fast-changing nature of the situation, this revision is based on assumptions that the Strait of Hormuz opens to cargo traffic within the next two-three weeks and the majority of key facilities, such as oil, gas and fertiliser sites, return to normal within a year.

Key drivers

As an energy intensive industry, the current disruption to global oil and gas markets is having a direct and immediate impact on production costs for UK food and drink manufacturers. Energy is required at every stage of the manufacturing process and while many medium and larger sized businesses hedge fluctuations in prices with a mixture of contract lengths, they’re bracing themselves for sharp rises as contracts come up for renewal. Meanwhile, smaller producers, which tend to buy energy ‘on the spot’, are already experiencing cost spikes.

These pressures are amplified by rising transportation costs, also driven by higher oil prices, and by ongoing delays and disruption across global shipping routes.

There’s also the impact of lost sales. UK exporters of products popular in the Middle East – such as cereals, chocolate, cheese and biscuits – have had to pause or cancel shipments to the region, adding uncertainty for manufacturers.

Looking at the wider supply chain, agriculture, which is the first link in the chain, is already impacted. The cost of red diesel (used to power farm machinery) has surged 80% since the start of the conflict¹ and availability is tightening in some regions of the UK. Fertiliser markets remain tight and supply is a concern for livestock farmers in particular. And crop growers – particularly those reliant on high levels of energy, such as for heating their greenhouses – are also affected by the volatile energy prices, which will have a knock-on to impact supply and prices.

Dr Liliana Danila, Chief Economist, The Food and Drink Federation (FDF), said:  

“The food and drink sector is already feeling the force of this geopolitical shock. As one of the UK’s energy intensive industries, manufacturers are facing mounting energy bills, rising transport and packaging costs and disruption across key supply chains. These pressures are hitting simultaneously, and are a significant challenge for businesses to absorb.

“The current situation is unprecedented and hard to predict, however given the scale and speed of these cost increases, and despite companies’ best efforts not to pass price increases on, it’s clear that food inflation is going to rise in the months ahead.”

Helping manufacturers weather the storm

There are a number of ways that government can soften the impact on food and drink manufacturers and limit food and drink price rises for households. In particular:

• Include Food and Drink in the British Industrial Competitiveness Scheme – which offers support with industrial electricity bills. The sector currently isn’t eligible as it’s not considered ‘Advanced Manufacturing’.
• Government policy continues to add costs to food and drink manufacturers – from the packaging systems change government is bringing in with Extended Producer Responsibility (EPR) and the Deposit Return Scheme (DRS), to the changes to UK law the sector will need to adapt to flowing from the EU-UK SPS Agreement. So, we are asking government to delay new regulation, such as the proposed Nutrient Profiling Model (NPM) changes and scrap a number of outdated regulations to ease the pressures faced by the sector and help tackle inflation.

1. Source