Inflation. It’s dominating not just business but mainstream headlines globally, with executives and consumers wrestling with cost pressures not seen in many markets for decades. Consumers are already changing their behaviour and there is a concern both in boardrooms and on high streets about the outlook for inflation.

At the start of the month, the UN’s Food and Agriculture Organization said its index of select commodity prices was still 13% higher in July than the year before. However, the index was lower than in June – which represented the fourth consecutive monthly decline.

In a new report on the outlook for inflation across industries, Just Food’s parent GlobalData says it appears likely that, at a macro level, commodity prices have peaked due to the weakening economic outlook in China and an anticipated slowdown in demand in the US. However, as the research and intelligence company points out, the main upside risk to inflation remains the war in Ukraine, even as grain shipments from the country have resumed.

It’s important to note that, even as food commodity prices have eased in recent months, they are still higher than those seen in early 2021. It’s also vital to remember the outlook for prices varies by commodity. For example, oilseed prices move in a band with crude oil prices due to the influence of biofuels. This band has reset, lower, as Indonesia – the world’s largest producer of palm oil – has reduced export levies to encourage exports. This has pushed prices in the whole oilseed complex lower.

Sunflower oil prices have also fallen despite lower crushing in Ukraine. That’s partly because India and Turkey, which have not applied sanctions, are importing Russian sunflower oil.

In grains, despite the hot and dry conditions in the US and Europe, prices have eased as commodities have begun flowing from Russia and Ukraine. Russian wheat production is expected to reach record levels in 2022 following good weather and high yields.

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However, the tightness of the markets means that, although prices have fallen back from the initial highs following the invasion of Ukraine, they are still high compared to those of twelve months ago.

GlobalData also notes the continuing pressure the war in Ukraine is putting on inputs such as fertiliser and energy. The high natural gas prices seen in Europe are weighing on fertiliser production outside Russia, a major player.

“Agricultural commodity prices have generally eased back to early 2022 levels but are still higher than those of early 2021. Crucially for global food supplies, Ukraine and Russia have established an agreement on Black Sea grain exports. On a more cautionary note, the UN continues to warn about the impact of fertiliser shortages, especially in vulnerable countries including much of Africa. Ongoing extremes of weather will keep food prices elevated and volatile, making it hard for downstream producers,” the GlobalData report reads.

How are consumers reacting?

As food manufacturers continue to closely monitor their own costs, they’re also scrutinising how consumer price inflation is affecting shopping habits. Fuel, energy and raw-material costs are having a knock-on effect on supply chains that consumers are having to pay for at the till. Despite some high-profile disagreements on price between some food manufacturers and retailers, many suppliers have succeeded in passing through costs and higher food prices have proved a critical component in the overall inflation rates reported by countries around the world.

Food is one of the more resilient sectors, with the essential nature of many purchases meaning demand can be relatively inelastic. However, it would be a naïve or hopelessly optimistic chief executive that believes his products are insulated from the inflationary pressure seen across markets. Already, there are signs of private label making inroads in brand-centric markets like the US. Data is showing consumers are switching to lower-priced products within certain categories, with those moves notably evident in areas including snacks, confectionery and frozen food, according to research by McKinsey in selected European markets.

In the UK, the latest data from Kantar shows Aldi breathing down the neck of Morrisons, the fourth-largest grocer in the country by market share. As UK consumers make changes to what they spend as inflation bites, Aldi and fellow cut-price retailer Lidl gained 1.8% of grocery sales during the 12 weeks to 7 August, “representing a GBP2.3bn annual shift in spending towards the discounters”, Kantar said last week.

On a global basis, a recent survey conducted GlobalData shows 84% of consumers are concerned about the impact of inflation. The group says “non-essential or indulgence categories” in the FMCG sector will be directly impacted. In food, it points to snacks and confectionery, where it forecasts volumes will fall between 2021 and 2024 “as consumers start switching away from indulgence categories”.

In its new report, GlobalData points to evidence of this consumer move away from “non-essentials” already happening in the US. Chocolate and confectionery again appear to be areas hardest hit Stateside, although GlobalData’s recent surveys also show a decline in the number of consumers stating they are spending “a high amount” on ice cream and in savoury snacks.

Nevertheless, the research group underlines how consumers “should not be considered as a single, homogenous mass” when it comes to concerns about inflation and any changing habits as a result. “There exist significant differences in attitudes between different regions, age, and income cohorts,” GlobalData’s inflation report reads.

GlobalData’s survey work suggests consumers in South Africa “are the most concerned about the impacts of inflation; Australia currently the least”. Overall, the researchers say developing markets are currently most concerned about inflation. In developed economies, there can be differences in the levels of anxiety about costs, with, for example, consumers in the UK more concerned about energy bills than their counterparts in the US and Australia due to those two countries’ larger sources of domestic fuel.

There are also some signs of differences by generational cohorts, GlobalData says. In the UK, younger consumers are exhibiting more willingness to change their shopping patterns in the face of pressure from inflation. Some 23% of Boomers in the UK claim they will not switch to cheaper stores, whereas their younger counterparts are much more likely to move elsewhere.

Inflation set to dampen foodservice outlook

In the foodservice sector, richer income groups in Australia are unwilling to give up restaurant meals but around a fifth of the lowest earners never go to restaurants and a further fifth are now having to give up.

Overall, for a sector hit hard by the pandemic and hoping for a sustained rebound, there are clouds on the horizon for foodservice operators as consumers monitor their spending.

GlobalData again points to changes in behaviour in the US foodservice market, where it asserts that leisure venues, pubs/clubs/bars, mobile operators and takeaway firms are most at risk.

“Low-value, habitual spending in coffee and tea shops appears to be the least at-risk currently, perhaps owing to the ‘lipstick-effect’ of a retained inexpensive luxury,” GlobalData says. “Full-service restaurants, while potentially having a higher price tag, are nevertheless able to demonstrate strong value-for-money via service, which will still be important in a consumer environment where experiences are highly sought after.”

On the overall picture for consumers, it adds: “The fourth quarter of this year may be a particular crunch point for consumer spending, especially in the UK as the energy cap rises further and many will have exhausted the savings accumulated during lockdowns.”

The prospects for inflation beyond 2022

In the UK this week, a report by investment bank Citi grabbed front-page headlines with a forecast that inflation in the country will hit 18% in the first quarter of 2023. The last time inflation hit that level in the UK was in 1976.

Such forecasts will only feed into UK consumers’ concerns and any changes they’re making to how they buy and what they buy. Food will not be immune to those changes.

Overall, GlobalData’s macro-level inflation report says recessions are expected across many developed markets before the end of 2022. That, the group argues, will reduce the labour component of inflation and ease input costs – but will also mean lower demand as the pressure on consumers increases.

“This is likely to see central banks ease on the current interest rate rising cycle, with the US likely to be the first developed market see a return in consumer demand as disinflation helps to restore purchasing power. China’s cyclical outlook is sharply divergent from western markets, with the end of zero Covid, most likely around Q2 next year, releasing pent-up demand, though on a much smaller scale than seen in developed markets in 2021,” GlobalData says.

Beyond 2023, GlobalData expects to see “a persistently higher and more volatile inflationary outlook but not one where inflation spirals”. It predicts “a mirage of slowing inflation is set to emerge, followed by a new higher inflation regime”.

The researchers add: “A global shift in labour markets (characterised by a reduced supply of new labour in many markets), will mean a return to higher wage inflation. At the same time, while de-globalisation means domestic costs in most developed markets will be more responsive to labour market conditions, demand is set to rebuild. This is particularly true in the US, where greater policy tolerance of wage growth and resultant inflation means a re-building of middle-income household demand.”