Decline in UK Food and Drink manufacturing input costs mark first drop since 2016
UK food and drink manufacturers’ costs fell for the first time in more than seven years in May, according to the Lloyds Bank UK Sector Tracker, providing reason for optimism around future UK food price inflation.
In May, the sector posted 49.4 on the Tracker’s measure of input costs – the first month it has registered below the 50.0 mark, the level that represents contraction, since April 2016.
This was supported by a drop in commodity prices. The UN’s Food Price Index, which measures changes in global food commodity prices, decreased 2.6% in May, driven by steep falls in the price of vegetable oils, cereals and dairy products1, and has fallen 21.3% since May 2022.
In total, four of the 14 UK sectors monitored by the Tracker saw their input costs decrease in May, the highest number since June 2020, indicating some broadening in the easing of cost pressures across the UK economy.
Seven other sectors also saw input costs continue to rise, but at a slower pace than the month before, bringing the total number of sectors with either decreasing costs or slowing cost rises to 11 – one more than April.
Salaries are ‘stickiest’ cost inflation driver
Of the four potential drivers of cost inflation monitored by the Tracker – material prices, shipping costs, energy costs and salaries – salary inflation is the ‘stickiest’ element, remaining close to its peak level (2.28 times the long-run average, against a peak of 5.07 times recorded in May 2022).
The figures indicate that robust competition for staff could keep salary inflation high in the months ahead. In May, the number of businesses citing difficulties retaining employees hit a record high (2.0 times the long-run average).
Eight of the sectors monitored, including food and drink manufacturing (57.6 in May vs. 54.0 in April), also saw output expand in May, two fewer than in April. Chemicals manufacturing (36.6), metals and mining (48.3), food and drink manufacturers (49.4) and household product manufacturers (47.1) all saw their input costs fall in May.
Eight sectors reported output growth, including automobiles and auto parts manufacturing (59.4 in May vs. 53.1 in April), food and drink manufacturing (57.6 vs. 54.0), household products manufacturing (54.2 vs.46.7).
Nikesh Sawjani, Senior UK Economist at Lloyds Bank Corporate & Institutional Banking, said: “Our report shows that more sectors experienced moderations in cost pressures in May which, if sustained and broadened out to other parts of the UK economy, would clearly be good news for the inflation outlook.
“These falls in costs mostly reflect reductions in shipping, raw materials and energy expenses, however, and our data suggests that cost pressures associated with wage bills remain strong as firms continued to compete for staff.
“Retention issues rose to a record high in May, indicating that competition for staff is still intense in some industries, suggesting that overall pay pressures may remain elevated for some time.”
Annabel Finlay, Managing Director, Food, Drink and Leisure at Lloyds Bank Corporate & Institutional Banking, added: “This drop breaks sustained rises in production costs for food and drink manufacturers, which have been among the sharpest of any sector monitored by the Tracker.
“If production costs continue to fall, whilst welcome, it will still take some time before we see the benefit in terms of shelf prices. This is, in part, due to the long-term nature of contracts between the manufacturers and retailers, as well as the broader segments of the production chain.
“With the continued risk of future disruption to supply chains that could mean input costs rise again, food and drink manufacturing companies should continue to review their supply relationships and optimise their working capital to help shield against any market shocks and build ongoing resilience.”
