UK food inflation is set to rise more sharply than expected this year as the impact of conflict in the Middle East feeds through into energy and supply chains, according to Shore Capital.
Grocers, including the likes of Tesco PLC (LSE:TSCO), J Sainsbury PLC (LSE:SBRY), Lidl, Aldi and B&M European Value Retail SA (LSE:BME), are expected to prove more resilient than discretionary retailers as household budgets come under pressure.
Shore Capital analyst Clive Black said he and his team's earlier earlier “cautious optimism” has been “diluted” as the impact of the Middle East conflict feeds into prices, with domestic food inflation now expected to exceed 3% by the end of 2026, up from previous forecasts of 2.0-2.5%.
Higher oil prices are already pushing up costs across the system. Diesel prices have risen 24% since early March, while petrol is up 13%, increasing pressure on household budgets and logistics costs.
These pressures are feeding through into fertiliser, packaging and transport, with dairy farmers and other producers facing margin squeezes as input costs rise faster than selling prices.
"The longer the military actions persist… the more elevated and sustained is the impact upon the UK consumer economy”, with higher costs likely to feed through gradually into grocery prices, said Black.
The squeeze is already visible in weaker confidence, with the broker warning of “more compressed real living standards” and a more fragile outlook for discretionary spending.