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UK Food Inflation Still Exceeds Eurozone Rates

In mid-November (2011), the Office for National Statistics in the UK reported that the October data showed that annual inflation in the UK had declined slightly, from 5.2% to 5%. Part of the reason for this decline was the drop in food price inflation. In recent months, this had been high: the data from the OECD for the first quarter of 2011 reported food price inflation in the UK at 5.5% which had risen to 6.3% in the third quarter of 2011. Clearly, then the October figure of 5% represented some good news.

There are perhaps two reasons for this tail-off in UK food inflation. First, while world commodity prices in the early part of 2011 had been at high levels, the upward pressures had begun to level off. This however takes time to work through the food sector so any decline on world markets should filter through to lower food inflation over future months. Second, and perhaps more relevant for October’s monthly figures, was the heavy discounting by supermarkets. Most notably, Tesco-the market leaderhad announced a £500 million “Big Price Drop” campaign which aimed to cut the cost of 3,000 everyday items. This has sparked responses from the other supermarkets with various price promises to assure customers that they will not be beaten on price whatever their rivals are doing. That said, the decline in food price inflation is relatively marginal and, notably, food price inflation in the UK still exceeds that of many other European countries. Recent data from the OECD highlights this. If you take the  data for the Eurozone countries that the OECD publishes, food price inflation across the Eurozone countries was, on average, 3.6%. But, behind this average is substantial variation: some of the smaller Eurozone countries reported higher food inflation with the Slovak Republic and Estonia around the 6% mark. However, some of the big hitters in the Eurozone had lower food inflation rates most notably France (3.5%) and Germany (3.3%). The more crisis-prone countries did even better: Italy (2.5%), Portugal (2.1%), Spain (2.2%), and Ireland (1.4%). So, the 5% October figure represents some good news for the UK but there is substantial variation across the EU and the UK experience is at the higher end of the distribution and it still has some way to go in getting to the levels experienced in other Eurozone countries.

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