The Food and Drink Federation (FDF) has revised its food inflation forecast, expecting it to reach more than 9% by the end of the year.
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 now anticipates that food inflation will reach at least 9% by the end of the year.
It said the revision was based on assumptions that the Strait of Hormuz would open to cargo traffic within the next two to three weeks and the majority of key facilities, such as oil, gas and fertiliser sites would return to normal within a year.
Oil and gas prices impact food manufacturers
FDF highlighted that the disruption to oil and gas markets was having a “direct and immediate impact” on production costs for UK food and drink manufacturers. It said that medium and large businesses were bracing themselves for “sharp rises” as contracts come up for renewal, while smaller producers were already experiencing cost spikes due to purchasing energy “on the spot”.
These pressures were amplified by rising transportation costs, also driven by higher oil prices, and by ongoing delays and disruption across global shipping routes.
FDF also pointed out that 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 is reportedly already impacted. The cost of red diesel (used to power farm machinery) has surged 80% since the start of the conflict and availability is tightening in some regions of the UK.
Fertiliser markets remain tight and supply is a concern for livestock farmers in particular, said FDF, and crop growers are also affected by the “volatile” energy prices. It highlighted that this was particularly the case for those reliant on high levels of energy, such as heating their greenhouses.
To soften the impact on food manufacturers, FDF said Government could include food and drink in the British Industrial Competitiveness Scheme and delay new regulation such as the proposed Nutrient Profiling Model (NPM) changes. It also suggested Government scrap a number of “outdated” regulations to ease the pressures faced by the sector and to help tackle inflation.
“Given the scale and speed of these cost increases… it’s clear that food inflation is going to rise in the months ahead.”
Dr Liliana Danila, chief economist of the 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.”
