GlobalData Reports Soaring Food and Energy Prices to Remain Pain Points for UK Economy in 2023

The overall inflation rate in the UK is expected to remain stubbornly high at 6.8% in 2023, far above the Bank of England’s inflation target of 2%. In particular, the food and energy inflation rates are forecast to reach 7.2% and 16.7%, respectively, exacerbating the financial burden on the country

The cost-of-living crisis in the UK is becoming increasingly severe as millions of people struggle to keep up with soaring prices, particularly for essential goods like food and energy. The overall inflation rate in the UK is expected to remain stubbornly high at 6.8% in 2023, far above the Bank of England’s inflation target of 2%. In particular, the food and energy inflation rates are forecast to reach 7.2% and 16.7%, respectively, exacerbating the financial burden on households and businesses across the country, predicts GlobalData.

Although the overall inflation rate in the UK eased for the third consecutive month to 10.1% in January 2023, it stayed above 10% from September 2022 onwards. Food and energy inflation stayed above 15% and 88%, respectively, from October 2022 onwards. Prices of all food items remained above 15% in January 2023 including milk, cheese, and eggs (31.1%), oil and fats (26.7%), bread and cereals (16%), fish (15.7%), vegetables (15.5%) and meat (15%).

On the other hand, the prices of electricity, gas and other fuels increased by 89.5% in January 2023 compared to 22.7% in January 2022. High energy inflation in January 2023 was mainly driven by 129.4% rise in the prices of gas, and 66.7% rise in the prices of electricity, on an annual basis.

Arnab Nath, Economist at GlobalData, comments: “The outbreak of bird flu, rising cost of production due to higher cost for feed and energy continue to remain the key concern for the domestic producer of vegetables, eggs, meats, and other dairy products.

“On the external side, bad weather conditions in Spain and Morocco, the UK’s key import partners of agricultural products, resulted in the shortages of farm produce, seriously challenging the food security. However, the food supply shortage is expected to ease in next three to four months as fresh farm producers just planted vegetables in February 2023 instead of December 2022, according to Lea Valley Growers Association (represents 80 growers across the UK).”

The average regular pay, excluding bonuses, grew by 6.7% in the three months ended December 2022, whereas the inflation rate during the same period averaged 10.8%, according to Office of National Statistics (ONS). As the wage growth could not keep pace with the elevated prices, GlobalData forecasts the real household consumption expenditure to contract by 1.4% in 2023.

The negative impact of high raw material prices and lower disposable income will be felt on various industries. GlobalData forecasts the gross value added in the wholesale, retail trade and hotels in nominal terms to expand at a slower pace of 5.5% in 2023 compared to 7.4% in 2022. Construction sector GVA growth is also projected to slow down from 6.5% in 2022 to 4.8% in 2023, as higher material costs continue to take a toll on the sector.

The Bank of England (BoE) intervened to tame inflationary pressure by hiking policy rate nine times by a total of 375 bps during January 2022 to February 2023. Higher borrowing costs, supply side issues and higher prices are projected to drive the UK economy to a recession with real GDP forecast to contract by 0.8% in 2023.

Nath concludes: “The long-term solution for the growing energy crisis is to shift towards alternative energy sources. However, to tackle energy crisis, the UK government has opened new oil and gas licencing rounds as of October 2022, to develop offshore areas in North Sea to produce oil and gas, which may make it difficult for the country to meet its net zero emission target.”