The Bank of England has warned that the UK economy will shrink this year as it raises interest rates in a bid to tackle rising prices, including record grocery inflation.

Interest rates rose to 1% from 0.75%, their highest level since 2009 and the fourth consecutive increase since December 2021.

Inflation, at its highest for 30 years, is set to breach 10% by the end of the year, with fuel, energy and food costs soaring, partly due to the Ukraine war.

Grocery prices were 5.9% higher in April compared to a year ago, the biggest increase since December 2011, according to research company Kantar. Food prices were rising fastest in markets such as fresh lamb and savoury snacks.

Kantar suggests that shoppers are turning to discount retailers Aldi and Lidl as pressures on budgets grows.

Shrinkflation

To tackle the ongoing rises in production costs, food manufacturers – including Cadbury – have reduced the size of some of their products whilst keeping prices the same.

According to The Institute of Grocery Distribution (IGD), 80% of UK shoppers have noticed shrinkflation happening in retail in the last 12 months. Awareness of shrinkflation varies by grocery category.

Sweet snacks have the highest level of awareness with 59% of consumers noticing items getting smaller in the last year. For chilled products, such as ready meals and prepared meats, this drops to just over a quarter of shoppers. While fresh meat and fish sits lower at 19% and dairy 17%.

A report by the Agriculture and Horticulture Development Board (AHDB) examined the options for the meat and dairy industries when it comes to reducing the size of product to tackle rising costs.

AHDB said reducing weight would be easiest for categories where cutting is involved, such as steaks and cheese, or where you can package slightly less, such as mince, yoghurt and ice cream. However, what needs to be considered when reducing the size of an offering is if the shopper is going to be informed. Retail and foodservice, AHDB say, run the risk of media pick-up or negative noise on social platforms.

Among its recommendations, AHDB’s report found:

• Inflationary pressures are felt by all and therefore an honest approach to product or pricing changes may be better received by consumers.
• Quality is key – when changing an offering (either size or re-formulation) the quality of the product must be maintained or exceeded, and if increasing prices this must be justified.
• When deciding which approach to take consider the spending ability, or social grade, of your customer base.