The accelerating pace of food price inflation in recent months has come as a nasty shock to British consumers, who are used to their weekly shop being cheaper relative to household income.

According to data from the British Retail Consortium and NielsenIQ, UK Food prices It was 13.3 percent higher in November than in the same month last year. The National Bureau of Statistics’ official measure is even higher, at 16 percent for the same month. Prices haven’t risen at this rate since the late 1970s.

All supermarkets say their prices are rising at a slower rate than Address numberswhich does not allow shoppers to trade in cheaper products or simply buy less.

But they also admit that customers are antsy and are looking to economize any way they can. Many have publicly stated that they will forgo some profits this year to keep pricing competitive.

If they do not benefit from the high prices, then who – if any -?

Feed, fuel and fertilizer

The most important costs across the food chain are the “three staples” – feed, fuel and fertilizer. Price increases for these products are felt first by farmers, followed by processors, and finally by retailers and their customers.

Processors are often protected from price increases for a while by pre-purchasing components. That means it’s quite normal for price increases to take six months or more to pass through to the consumer, said Charles Hall, head of research at Peel Hunt.

“If you take dairy, farmers started seeing feed prices go up at the end of 2021. Then that accelerated into 2022 with the Ukraine war, but milk prices didn’t really start to go up until May,” he said.

He added that livestock farming was particularly affected by the rise in feed prices, as it accounts for up to 70 percent of the cost of raising chickens and pigs.

Prices for many commodities have fallen since then, but some processors will still be on contracts agreed upon months ago when conditions were different.

“You may still have another six months before that [raw material costs] Hall said.

In its semi-annual results in September, takeaway company Bakafor said it expected “significant” inflation to continue throughout 2023, after forecasting a 12-14 percent rise in the current fiscal year.

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The dollar hits

Even if global commodity prices fall, there is a complicating factor for UK and European food producers.

The US dollar has strengthened this year – partly because it usually happens during times of geopolitical uncertainty and partly because the Federal Reserve has raised interest rates more quickly than other central banks.

Forward purchasing and treasury management will have to mitigate some of this impact. But the effects of a strong dollar – the currency in which all globally traded commodities are priced – are still being felt for the rest of 2023.

Global Warming

Most areas of food processing and retail are not very energy intensive and historically the industry has paid little attention to the cost of gas and electricity because they were a relatively small component of overall production costs.

That changed with a vengeance in 2022. Companies like Premier Foods, meat processor Hilton, poultry giant 2 Sisters and Associated British Foods often pay three times more for energy than they did last year, driving up food prices.

Hall said the prices of many winter vegetables will rise because farmers who use greenhouses incur higher heating costs. Cucumbers and peppers have already been affected, with prices rising and local yields declining as some growers decide it is no longer cost-effective.

Although wholesale gas prices have fallen from their 2022 peak, British government support to help companies deal with sharply higher energy prices is set to become less generous from April.

Wage-price spiral

One big issue for food producers and retailers predates the Ukraine crisis: labor costs.

In the UK, the minimum wage – paid to most workers in the food industry – has risen from £7.20 in 2016, to £9.50 now, and will rise by another 9.7 per cent to £10.42 in April.

Most supermarkets are already paying more to attract staff after older workers leave the labor market and there are fewer arrivals from Eastern Europe due to Brexit.

Employment is also a problem for the labor-intensive parts of food production, such as meat and poultry processing and fruit raising, which were also dependent on low-wage workers from Eastern Europe.

Ministers launched a visa scheme for seasonal farm workers, allocating 45,000 this year. But additional administrative expenses and the need to look as far away as Indonesia and Nepal for workers drove up costs. Farm labor costs rose 13 percent in the year ending fall 2022, according to data compiled by the National Farmers Federation.

Rising costs particularly affected egg farmers, who reduced their flocks because the costs outweighed the prices they received for eggs, leading to shortages on UK supermarket shelves. Dairy farmers, by contrast, have benefited from sharply higher milk costs, which has helped them recover, said Clive Black, head of research at Shore Capital. “It really is a complex panorama of winners and losers.”

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Brand strength

Rising prices for many things at once has left companies throughout the supply chain scrambling to cut other costs and calculating how much increases they can pass on without losing market share.

Large branded food groups such as Nestle, Unilever and Mars have much larger profit margins than processors and retailers. Their brand strength makes it easier for them to push price increases while superior profitability allows them more leeway to absorb increased costs.

“Global A-tier manufacturers have been tougher — because they can be, because they control their brands — in the face of price hikes,” Black said.

Most of them have been hit by profit margins in 2022: Unilever’s operating margin, for example, fell 2 percentage points to 15.2 percent in the first half of the previous year. One group bucking the trend was Premier Foods, which makes Mr. Kipling’s scones and Sharwood’s sauces, resulting in higher trading profit margins than two years earlier.

Shoppers are beginning to turn to supermarket brands to save money, but profitability in the companies that produce these goods is low. “Private-brand manufacturers, who tend to incur inflation early and cost recovery late, are challenged by the current inflationary environment,” Black said.

Food retailing is a very close-knit industry in the UK, with the four largest traditional supermarkets – Tesco, J Sainsbury’s, Asda and Morrisons – plus discounters Aldi and Lidl controlling more than four-fifths of the market. But the competition is stiff and recent history suggests that those who don’t maintain competitive prices lose customers very quickly.

And profits are anemic: even at market leader Tesco, operating margin was 3.9 per cent in the UK and Ireland in the first six months of the year, and costs have escalated further since then.