Verdict Research Consulting

A typical basket of 100 grocery items in the UK cost 5.8% more in May 2008 than it did at the beginning of the year, according to new research from Verdict, in effect adding around £514m a month to the nation’s grocery bill. For hard pressed consumers, such an increase comes on top of a host of other price rises and demonstrates why, for many households, inflation feels far higher that the UK government’s official rate.

Fuelling the perception of inflation

Accounting for 13 pence in every pound spent by shoppers, grocery is one of the most significant areas of consumer expenditure. As such, an increase in prices of 5.8% since the start of the year is particularly painful and means that in effect, compared to January, the nation is collectively paying an additional £514m a month for its grocery shopping. Such rises, combined with hikes across other areas of household expenditure, are squeezing the amount consumers have to spend on things like leisure activities and on other retail goods. For many people it also means that inflation feels far higher than the government’s official rate.

“Food shopping is something most people do regularly, so they immediately notice increases in prices more than they do in other areas” comments Neil Saunders, Consulting Director of Verdict. “For many, the price of the weekly food shop is the real measure of inflation – it’s what they react to when they make decisions about the household budget and what to spend on other things”.

With average wage inflation running at just under 2% across the same period, the increased cost of food more often has to be found from savings made across other areas of spending. The pressure is particularly acute on those with low earnings since a greater proportion of their incomes are spent on food.

Price of fresh fruit and vegetables rises by 16%

On a product basis, the cost increases vary significantly (see Table 1). One of the sharpest areas of increase is in the price of fresh fruits and vegetables, which have increased by almost 16% since the beginning of the year. Almost all essential foods, including dairy, store cupboard products (which include pasta, canned goods and condiments) and meat and fish have seen above average increases.

A minority of areas, including health and beauty products sold in grocers as well as ready meals, have seen falls in price since January.

Grocers – the consumer champions

Although the price of goods is rising, the UK’s grocers are helping to mitigate price increases.

Verdict’s research shows that since January the cost of a basket of own label products at Britain’s four main grocers (Tesco, Sainsbury’s, Asda and Morrisons) has increased by 5.6%. Comparatively, a similar basket of branded products has increased by 6.1%.

Furthermore, many products in the grocers’ value ranges – often the cheapest products available in store – have seen little price inflation since January. The price of a low cost loaf of bread at the four leading grocers remains at 37p – pretty much unchanged since the beginning of the year. The value lines give consumers the opportunity to trade down in order to save money on their grocery shopping.

“No matter how bad food inflation is, it would be a whole lot worse if it wasn’t for our highly competitive grocery sector” says Saunders. “The size and efficiency of our leading grocers, the economies of scale they bring to the whole retail food market and the competition between them have all helped mitigate the amount inflation passed to the consumer.”

Verdict estimates that farm gate inflation has been running at more than double that of retail food inflation and in the case of some staples such as rice or cereals, price inflation has been even higher.

Inflation here to stay

The future prospects for food inflation will bring little comfort to the consumer. Verdict forecasts that food price inflation will remain strong for the duration of 2008 and that an inflationary push will persist into 2009.

“There is very little sign that the price of food is going to moderate or fall” comments Saunders. “The price increase is partly a result of global demand outstripping supply and there is very little that can be done to remedy that imbalance over the medium term.”