Bank of England Chief Economist Huw Pill warned that prices in UK supermarkets may never fall back from their painfully high levels despite the plunge in international commodity markets.
Pill predicted that “substantial” falls on global food markets will eventually feed through to shoppers, though this may only slow the pace of increases in grocery bills rather than lead to an outright drop in the cost of products.
“Unfortunately, the days of seeing food prices fall — that does seem to be something that we may not be seeing for a little while yet if in the future at all,” Pill said Monday in a web question and answer session following the BOE’s latest rate increase last week.
“Our expectation at the moment is that food price inflation will fall back towards about 10% by the end of this year and then further next year,” he said. “That’s still not a very comfortable level.”
Pill’s remarks underscore the pain still facing many households from inflation running well above the BOE’s 2% target even as price growth moderates.
Pill was careful not to signal which way rates will go next, in step with the BOE’s neutral stance on policy. Officials said last week that further tightening will be required if evidence that inflation will persist emerges.
Pill said that much of the rate hikes the BOE has delivered since 2021 has yet to hit the economy, that there’s risks rates have already gone too high and also that they may need to go up again.
He said inflation remains “much too high” and that the BOE expects it to fall to 5% by the end of this year and back to the 2% target by the first half of 2025.
Soaring food prices have been a key driver of UK inflation despite falls on global food commodity markets. The BOE has blamed long-term contracts with suppliers for keeping grocery bills elevated by locking in costs.
Food prices soared 17.3% in the 12 months to June but industry contacts told the BOE that this is expected to fall to around 10% or below by the end of the year.
Pill said that double-digit food price increases would still not compatible with its 2% inflation target.
“Given that we’ve seen quite substantial falls in international food commodity prices over the last few months, we do you think that that will eventually work its way through the system as some of the contracts entered into last year run out,” said Pill.
Last week the BOE signaled that borrowing costs will stay at high levels for longer after lifting its key lending rate to 5.25%, a new 15-year high. Governor Andrew Bailey warned that the “last mile” in its inflation fight will mean a prolonged period where policy remains in restrictive territory.