UK inflation latest: Food prices surge after Reeves tax raid

UK food price inflation accelerated to 4.4% in May, up from 3.4% in April, contributing significantly to a higher-than-expected overall inflation rate of 3.4%. Economists attribute the rise to grocers passing on increased staff costs resulting from Chancellor Rachel Reeves’s tax policies, including higher National Insurance contributions and a minimum wage increase. This development is expected to influence the Bank of England's decision to hold interest rates steady at 4.25%, delaying potential rate cuts until August amid broader concerns about global uncertainty and rising oil prices.

Analysis

UK food price inflation accelerated notably in May, rising to 4.4% from 3.4% in April, marking its fastest pace in over a year and providing the largest upward contribution to the month's overall Consumer Price Index (CPI). The headline CPI remained unchanged at 3.4% for May, a figure previously revised down from 3.5% for April due to an ONS data error. Economists suggest this surge in food prices is linked to businesses, particularly grocers, passing on increased staff costs stemming from Chancellor Rachel Reeves's October Budget, which included higher National Insurance contributions and an increased minimum wage effective from April. This development is viewed as a setback for the Bank of England, with Capital Economics noting it as a tentative sign of firms transmitting these higher operational costs to selling prices. Berenberg highlighted that the stronger-than-anticipated food price inflation indicates grocers possess sufficient pricing power to pass on both increased staff costs and agricultural prices. Consequently, the Bank of England is widely expected to maintain interest rates at 4.25% in its upcoming decision, especially with inflation persisting above its 2% target and amid rising global oil prices, the impact of which is not yet reflected in the current CPI data. The ICAEW suggests that an interest rate cut is implausible before August, allowing policymakers more time to assess the impact of global uncertainties.

Key Decisions for Investors

• Investors should anticipate continued hawkishness from the Bank of England, supporting sterling strength in the short term but potentially weighing on UK equity valuations sensitive to higher interest rates.
• Monitor upcoming wage growth data and producer price indices for further signs of cost-pass-through, which could sustain inflationary pressures and delay monetary policy easing.
• Consider defensive positioning in sectors with strong pricing power, such as consumer staples, while being cautious about discretionary sectors that may be impacted by squeezed consumer spending due to rising food costs and sustained high interest rates.