Whatever happened to the supermarket price war? The latest inflation figures showed no signs of it. Food prices are surging. They recorded an ugly 4.4 per cent rise over the year to May, the sharpest increase in more than a year. That compares to the previous month’s 3.4 per cent jump. Remember, those rises are cumulative.
This will come as a bitter blow, particularly to low-income households for whom food takes up a disproportionate chunk of the household budget. It also raises a question: were the supermarkets pulling a fast one on us with all their talk about pumping money into lowering their prices a few short months ago? Was the supposed price war just smoke and mirrors? Or is this down to Rachel “We won’t raise taxes on working people” Reeves?
When I spoke to one of the big supermarkets, they insisted that this isn’t on them, pointing to City forecasts, which clearly show that the big players are going to make less money this year than they did last year.
“This is down to a combination of increased taxes, increased wages and the increased prices supermarkets are having to pay suppliers,” my source said, pointing to the sharply increased wholesale price of beef as an example of the latter. “We are competing hard, but cost inflation has to pass through at least in part.”
A particular sore point with retailers is the government’s packaging levy, which it prefers to call the “extended producer responsibility” (EPR) tax. Try saying that quickly three times. This shifts responsibility for the cost of household recycling from local authorities to the companies that use the packaging.
Conceptually, it would appear to make sense under the principle that the polluter pays, but it comes at a price: the British Retail Consortium puts the annual cost to retailers at as much as £2bn a year.
It doesn’t matter how efficient your grocer is, or how aggressively they reduce the costs they can cut; that number is simply too big for them to absorb. The supermarkets point to the jump in food price inflation as the result.
The latter isn’t just on the EPP. There is also Reeves’ decision to raise employer NICs, which is similarly out of the grocers’ control and will also have an impact on prices. Remember that the decision hit businesses that employ large numbers of people on relatively low wages the hardest because of the reduced threshold at which the tax kicks in. Supermarkets were right in the firing line.
As I’ve written previously, this functions as a stealth tax on working people. And so, arguably, does the EPR, with the poorest and most vulnerable people hit hardest. The chancellor should really stop trying to pretend otherwise and have a strategic rethink. You can’t keep banging on about how important “working people” are to you when you’re constantly kicking them in the guts.
With oil prices rising and the continued disruption to supply chains caused by crises such as Russia’s war in Ukraine and hostilities between Israel and Iran, food prices look likely to continue rising. A good harvest would be nice. But that’s not something we can bank on.
As for the bigger picture, headline inflation in May via the Consumer Price Index (CPI) came in at 3.4 per cent. There was a certain absurdity in the way the ONS reported the numbers. “The Consumer Prices Index (CPI) rose by 3.4 per cent in the 12 months to May 2025, compared with 3.5 per cent in the 12 months to April,” it declared. Except, this is not true because, as we know, the national stats body got its sums wrong last month and admitted that the actual number was 3.4 per cent. It just decided not to correct it.
Statements like that, which effectively say black is white, do nothing to restore public confidence in officialdom and government statistics. The decision not to correct was taken so as not to disrupt a bevvy of contracts linked to CPI. Well, okay, but the ONS should acknowledge the error in its statements.
As for the people relying on this dodgy data to set interest rates – by which I mean the Bank of England’s Monetary Policy Committee (MPC) – don’t get your hopes up. The City currently puts the chance of a cut at the latest meeting at just 10 per cent, and even that looks high to me.
This doesn’t mean the MPC’s meeting is inconsequential. Far from it. First, watch the vote. At the last meeting, the majority (five) opted for no change, but two MPC members called for a cut, while another two argued for a rise. Any change in those numbers will have an impact. People seeking mortgages, beware. If the MPC turns hawkish on rates, it will move the interest swaps market, which governs the price lenders pay to finance fixed-rate mortgages. The price of these could head higher even if the Bank holds steady.
The MPC’s minutes will also be closely watched, particularly for its view on the upheaval wrought by the Israel-Iran conflict, and the impact it is having on oil prices. The price at the pumps is already rising.
