Positive Signs for Food and Drink Manufacturing Costs

The most recent data on the food and drink manufacturing industry in the United Kingdom presents a promising development, as production costs have experienced a notable decrease, sparking optimism for a potential reduction in grocery inflation.

According to the Lloyds Bank UK Sector Tracker, production costs in the food and drink manufacturing sector saw a decrease, marking the first decline since April 2016. This trend was reflected in the industry’s score of 49.4 on the tracker’s table of input costs, which is a significant improvement after seven years of consistent cost increases.

The data revealed that inflationary pressures from materials prices, shipping costs, and energy costs have all shown signs of softening, following three years of continuous cost escalations due to the impact of Covid, Brexit, and the Ukraine conflict.

Similarly, the Make UK/BDO survey indicated that the UK manufacturing industry has maintained steady growth in the second quarter of 2023, following the challenges posed by the pandemic. The survey estimates a 0.3% shrinkage in the industry for 2023, a notable improvement from the previous predictions of a –3.3% contraction in Q1 and the -4.4% forecast made at the end of last year.

Furthermore, the food and drink sector’s expected output growth for 2023 has been revised upwards, with an initial forecast of a –2.4% estimate transforming into a 0.3% growth, surpassing the overall manufacturing average, which is anticipated to decline by –0.9% in 2023. The sector is anticipated to achieve a 0.9% growth in 2024.

Additionally, the monthly food prices index by the United Nations has shown a 2.6% decline in May, attributed to reductions in the prices of commodities such as cereals, vegetable oils, and dairy. The UK’s food inflation levels have also demonstrated a slowdown for the second consecutive month, as indicated by the latest ONS data.

Despite these positive developments, industry experts remain cautious regarding the immediate implications of the easing inflationary pressures on retail prices. James Brougham, senior economist at Make UK, highlighted the gradual nature of the improvements, while Richard Austin, BDO national head of manufacturing, emphasized that longer-term systemic challenges continue to pose a threat to the British manufacturing sector.

Furthermore, rising staff pay costs have been identified as a factor that could continue to support inflation in the coming months. Although the decrease in production costs is indeed a positive development, experts from Lloyds stressed that it may take some time before consumers observe the benefits in terms of retail prices on the shelves.

Despite the cautious approach, the recent decline in food and drink manufacturing costs signifies a step in the right direction, offering hope for an eventual relief from grocery inflation in the near future. The industry’s resilience and adaptability in navigating challenges continue to shape its trajectory, paving the way for continued growth and stability.