Food prices are likely to be the key factor behind inflation falling in 2023, according to one analyst.
Shore Capital head of research Clive Black expects inflation to decline in the calendar year to somewhere between 3% and 5%, from 9.3% currently.
But whether that decline has already started in recent weeks was thrown into doubt by two opposing sets of figures released today.
A report from the British Retail Consortium (BRC) and NielsenIQ indicated that food inflation remained on an upward trajectory, rising to 13.3% in December from 12.4% the month before.
But the latest supermarket sales figures from Kantar showed food price rises eased for a second month running with supermarket prices up 14.4% year-on-year in December, compared to 14.6% in November and 14.7% in October, which it said remained "painfully high" but suggested the "worst has now passed".
Food prices have been rising as a result of various factors since Russia invaded Ukraine last February, which fed through to spikes in the prices of core commodities such as maize, wheat and sunflower oil. Rising energy prices and other factors have also led to higher costs for food producers, adding a further element to elevate shop prices.
Rising inflation initially led to a decline in food volumes and mix and saw consumers flock to discounters such as Aldi, which displaced Morrisons as the UK’s fourth-biggest retailer this year, and Lidl.
Shore Cap's Black believes UK grocery volumes will start to stabilise from here on.
Taking a wider market view, he said overcoming inflation would be “key to a brighter economic and stock market future for consumer equities in the UK”.
“Calling peak inflation has yet to be confirmed and we also sense that the Bank of England, whilst not as forthright in its rhetoric as the US Federal Reserve, will wish to hold out on overcoming inflation for as long as possible against the challenges that recession may pose,” Black said.
Looking ahead into 2023, Black does not expect another “leftfield or calamitous event” this time such as the war in Ukraine, although he added he does not expect the war in Ukraine to end either.
What he does expect, however, is an easing of inflation figures which should feed into improved consumer confidence levels, resulting in a stabilisation of living standards by the end of the final quarter.