Prestige Purchasing founder and chairman David Read suggests inflation may be about to make a comeback

The cost of food and drink at the back door has changed very little for operators since as far back as early 2019. For most of us that feels like a lifetime ago. As always there has been some volatility in some categories (fish and seafood for example has been the wild child of the past couple of years), but swings have been compensated for by roundabouts, and inflation has been mostly benign.

But there are some early signs that prices may be heading upwards again as the months of 2021 unfold. There are a number of reasons for this, the first being international trade.

Analysis of January’s recently published trade numbers shows an alarmingly large fall year-on-year. Cheese exports for example plummeted from £45m to £7m, while whisky exports nosedived from £105m to £40m. Chocolate exports went from £41m to just £13m, a decline of 68%. Exports of some other goods such as salmon and beef almost stopped altogether, with declines of 98% and 92% respectively. Overall, trade in fish, thanks partly to a complete ban on the exports of certain live shellfish, dropped by 79%. Food and drink imports also fell significantly in the month, driven by a drop of nearly 25% from the EU compared to prior year worth around £700m.

Those who did not support Brexit will no doubt try to use these numbers as a reason why Brexit was a huge mistake. Those who did support it will rightly point to pandemic impacts, pre-January stockpiling, hospitality lockdowns, and temporary issues with additional non-tariff barriers. The truth though will be somewhere in between. Our forecasts made during last year of a high level of trade volatility immediately following the end of the transitional agreement have become a grim reality. The challenge now is to understand what is permanent, and what is temporary.

Overall, food and drink exports collapsed in January, plunging by 75.5% year-on-year, down to £256m from £1bn. Annualised, that is a fall in exports of around £9bn, which if continued would create major changes to both production and import levels of food and drink in the UK. It would be prudent not to put too much reliance on a single month’s numbers, but some kind of permanent correction in trade volume of food and drink does now appear likely. How this will shake out in UK producer and wholesale markets is difficult to predict, but the balance of probability rests on a return to upward movement in prices as a whole.

And macro-economic conditions look to be headed in an inflationary direction too. In his recent 2021 Budget, the Chancellor set out how the government plans to reduce the fiscal deficit over time and pay for pandemic support measures. UK public sector net debt, excluding public sector banks, at the end of January 2021 was £2114.6bn.

Realistically, he has three options: tighten fiscal policy; outgrow the debt burden; or inflate away the debt. His Budget suggests that he will be attempting to do all three.

He did the first when he froze income tax bands until 2026, which as rising wages and inflation do the work, avoids a politically unpopular announcement of higher tax rates, whilst raising an impressive £8bn per year by 2025-26. He also announced an increase in the corporate tax rate from 19% to 25%, which will take effect in 2023, which of course is likely to dominate the fiscal debate over the next few years.

He did the second by announcing a super-deduction capital allowance that will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive in a widely welcomed move that should act as a major investment catalyst.

The final way that the debt burden can be lowered is through higher inflation—higher nominal GDP will lower the debt-to-GDP ratio. The OBR forecasts that inflation will rise from 0.5% in 2020 to 2.0% in 2025—hardly a surprise as one would not expect an official prediction of inflation above the Bank of England’s target. But the incentives for governments and central banks globally will be to allow inflation to drift higher, both to protect against the risk of deflation/negative interest rates and help lower government debt burdens. It feels likely that this will be an increasingly popular route in the months and years ahead.