Food and drink manufacturers cut their prices in June for the first time in more than three years, after their own costs continued to fall, according to a survey by Lloyds Banking Group.
The reduction will come as a relief for households struggling with their budgets, as rising interest rates bump up mortgage costs and inflation remains more than four times its target at 8.7%.
It is the first time manufacturers in the sector have cut their prices — generally paid by wholesalers and retailers — since February 2020. In May, they reported that their own input costs had slipped for the first time since 2016, a trend which continued in June as global food commodity prices fell by 1.4% over the month.
“This could be good news when it comes to the future direction of UK food price inflation,” said Annabel Finlay, managing director of food, drink and leisure at Lloyds Bank Commercial Banking. “But it will likely be some time before any positive effect is seen on the price consumers pay at the till, and much could still change.”
Inflationary pressures remained strong outside of the food and drink sector, according to Lloyds’ UK Sector Tracker. While six of the 14 sectors monitored reported a fall in input costs — two more than the previous month, and the highest in three years — many businesses reported a rise in demand.
The number of firms which mentioned they were hiking prices to cope with strong customer appetite rose to 4.3-times the long-run average, from 2.5-times in May.
This could worry the Bank of England, which has been lifting its base rate since the end of 2021 in an attempt to dampen demand and bring inflation back down to the 2% target.
Read more: BOE Says 4 Million Households Face a Jump in Mortgage Costs
There is “clearly still strong demand in some areas of the economy which could lead to inflation being stickier than hoped,” said Nikesh Sawjani, senior UK economist at Lloyds Bank Corporate & Institutional Banking.
The signs that manufacturers in the food and drink sector are starting to pass on lower costs to customers will ease concerns that some firms are using inflation as an excuse to build their profit margins.
“Greedflation,” as it is dubbed in the media, is currently the subject of investigation by Parliament’s Environment, Food and Rural Affairs Committee and the UK Competition and Markets Authority.
But BOE policy maker Swati Dhingra has said there is little evidence of firms keeping prices artificially high. Other economists have said rises in profits are a consequence of the strong demand that has contributed to inflation, rather than being a direct cause of inflation themselves.
