Food inflation set for large fall

The rate of food price inflation is likely to decline rapidly over the next six months, before recovering slightly in 2010, according to the latest English Farming & Food Partnerships food inflation forecast.

The model, developed with Cranfield University, predicted that the annual rate of food price inflation could fall from around 10% to zero by the fourth quarter of this year, before a modest recovery early next year. The figure was well below the peak of 12.8% last August – a result of high commodity and energy prices and weakness of the pound.

Agricultural commodity prices had a large influence on retail food prices, but the report said their influence had been outweighed by the prices of other factors contributing to retail food inflation, such as manufacturing costs and logistics. These factors were included in general measures of inflation, such as CPI or RPI. Both of these had a high correlation with food price inflation and were generally not predicted to rise above 1% during 2010.

However, EFFP acknowledged that much depended on the length and depth of the recession and also cereal prices this harvest. “A marked decline in global cereals production could see a growing divergence between RFPI [Retail Food Price Inflation] and CPI inflation during 2010,” it said.

The EFFP forecast assumed cereal prices would rise following this year’s harvest, largely on the back of a smaller global crop and underlying tight stocks. “Predicting the precise effects of this assumption on cereal prices is impossible, but we believe that these factors – together with the weakness of sterling – will result in a rise in cereal prices over the second half of 2009.”

EFFP noted that meat prices had remained “stubbornly high” over the past year, largely a result of a fall in the value of the pound and tight supplies. But meat price inflation had started to decline and it was forecast to continue doing so over the next year.

“The apparent resilience of farming and food at a time of unprecedented economic uncertainty is encouraging,” EFFP chief executive Sion Roberts commented. “However, the recession is far from over. The economy will recover, but it will be slow and difficult and food and farming businesses will need to invest in their supply chain in order to grow and develop.”

The EFFP retail food price forecast is available in EFFP’s free quarterly publication, VIEW. Download the latest edition at www.effp.com