Food and drink manufacturers cut prices in sign of slowing UK food inflation

In September, the food and drink manufacturing sector posted a reading of 48.8 on the Tracker’s measure of output charges, down from 50.5 in August and the lowest reading since February 2020 (46.0), raising the prospect that food prices paid by consumers could fall significantly in the coming months. A reading above 50.0 indicates an increase, while a reading below 50.0 shows a fall. Of the 14 sectors monitored by the Tracker, it was the only sector to record a decrease in output charges.

The dip in prices paid by food and drink producers’ customers, including retailers and wholesalers, was driven by a fall in input costs in September (42.4 versus 43.3 in August). The last time the sector’s costs fell at this rate was November 2015 (39.6) and last month’s decrease is the sharpest of the five consecutive monthly falls recorded since May.

Key findings:

• Food and drink manufacturing was the only UK sector to lower its prices in September, as producers passed on falling input costs to their customers, including retailers.
• Food and drink manufacturers’ input costs fell for a fifth straight month, with September’s drop the sharpest recorded since November 2015.
• Out of 14 sectors, only food and drink manufacturing and software services saw increases in output – the lowest number of sectors to see an increase since October 2022.
  

As a result of cutting its prices, the food and drink manufacturing sector saw the strongest new order demand (60.7 vs 49.0 in August) and output growth (57.5 vs 52.8 the preceding month) of any sector monitored by the Tracker, followed by software and services (56.6 in September vs 50.7 in August).

The remaining 12 sectors monitored by the Tracker saw output contract in September – two more sectors than in August and the highest number since October 2022. All 12 sectors that saw falling output in September also recorded falling demand. The metals and mining sectors saw the overall sharpest fall, with output dipping to 45.7 in September from August’s 58.2. Elsewhere, the transportation sector is one of the UK economy’s biggest laggers for output, with September’s data showing 40.4, down on August’s 45.

Nikesh Sawjani, Senior UK Economist at Lloyds Bank Corporate & Institutional Banking, said: “September’s data is a perfect example of the relationship between pricing, demand, and growth. Food and drink manufacturing sector output grew faster than other UK sectors as producers lowered their prices in response to five consecutive months of falling costs.

“If producers continue to pass on cost reductions, we could see food price inflation fall sharply in the coming months. Further signs of easing inflation and a cooling UK labour market could be a signal that the Bank of England’s interest rate increases so far, are having the desired effect.”

Annabel Finlay, Managing Director, Food, Drink and Leisure at Lloyds Bank Commercial Banking, added: “The slowdown in food and drink manufacturers’ input costs is now clearly feeding through to the prices they charge their customers and, as a result, what consumers are paying at the till. If this trend continues, there is an opportunity for producers to leverage rising demand in the months ahead, particularly in the run up to Christmas.

“However, the UK food and drink supply chain doesn’t exist in a vacuum. There are several factors that could see this positive trend reverse, not least the broader economic outlook for the UK. Maintaining a strong working capital position will help ensure that producers are prepared for any further fluctuations in demand from their customers.”