What inflation surge means for your weekly shop – and March interest rate cuts
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A rise in inflation to three per cent year on year has caused surprise and unease in some quarters, coming in higher than the 2.8 per cent analysts had anticipated.
While in some ways the biggest contributory factors behind the inflation jump won’t be affecting everyone – you might not be buying plane tickets this month or sending your children to private schools at any point, for example – there’s certainly one area to immediately note: food.
Office for National Statistics (ONS) chief economist Grant Fitzner noted that the highest annual rate of inflation since March last year came partly as a result of year-on-year food comparisons, which saw 3.3 per cent inflation in January. “After falling this time last year, the cost of food and non-alcoholic drinks increased, particularly meat, bread and cereals,” he explained.
Balwinder Dhoot, director of Industry Growth and Sustainability at The Food and Drink Federation (FDF), further detailed why this is not going to be a quick fix; in fact, the FDF expect food inflation to continue rising towards four and five per cent over the second half of 2025.
“Unfortunately, this month isn’t likely to be a flash in the pan for rising food and drink prices. We’re yet to see the full impact of increasing labour costs in April, and we expect to see this filter through to shoppers over the coming year. We urge government to work with industry to simplify regulation and bring business costs down to help protect consumers from rising prices.”
So which areas of your weekly shop have been hit most, and which are going to potentially remain in the firing line?
Your shopping bill
To be blunt, coffee, cocoa and butter are among the regular items in your kitchen which have already been hit.
Coffee rose more than 11 per cent and chocolate by 14, but butter eclipsed both with more than an 18 per cent rise. On the positive side, pasta and couscous are down 5.9 per cent year on year and both sugar and rice are also seeing prices drop.
You may remember the surging cost of olive oil in 2024 – it’s still increasing year on year, but at a slowing rate now.
While future food costs are very difficult to predict due to global factors, the FDF’s Mr Dhoot told The Independent that there were clear reasons for some prices having risen.
“In cocoa there’s an issue around disease and declining production which pushes up prices and won’t be remedied soon,” he explained. Global cocoa production has been declining for three consecutive years.
“For butter you’ve got issues around tighter production and where people are choosing to sell cream rather than butter. We had the spike previously in eggs, which is now above trend but not hugely above. Egg production is affected by energy prices: fertiliser for feed, transport and shipping costs and so on, so rising energy bills will naturally affect food prices there.
“There’s also a lag between commodity prices rising and prices consumers receive. The food industry is competitive and it can withhold some price rises, but that means there can be a six-month-plus lag before rises are passed on.
“We’ve been expecting prices to go up this year above three and up to five per cent on food in the second half of the year. It’s jumped before we anticipated, but will likely remain reasonably high for the remainder of the year.”
Coffee production has been further hit by drought in Brazil, while tea production has been hit by pest activity and a Food Safety and Standards Agency crackdown on pesticide use affecting yields.
The FDF continue to urge discussion with government on where regulations and processes can be altered, to fix costs outside of the actual food materials – particularly around packaging and border controls – which might then in turn benefit consumers with lower prices.
Forget about another interest rate cut
Inflation doesn’t just affect food and prices of things, of course. The wider impacts are yet to be felt, but one almost certain knock-on effect is that the Bank of England will now be very unlikely to cut interest rates in March.
Having cut a quarter point from the base rate recently, down to 4.5 per cent, that was a boost for homeowners (though negative for savers).
The next meeting over potential cuts comes in late March, but with inflation on the rise, cutting interest rates is almost certainly a no-go until later in the year, says Thomas Pugh, economist at tax firm RSM UK.
“Despite headline inflation coming in hotter-than-expected, the number that matters more for the MPC is services inflation, which was actually a little softer than the latest forecast (5.0 per cent vs 5.2 per cent). That suggests domestic price pressures aren’t as strong as implied by the jump in the headline rate and keeps the idea of a rate cut in May firmly on the table.”
That comes on 8 May in a potential spring boost for households – but it will in part depend on whether inflation continues to lift.
What else are the experts saying?
AJ Bell analyst Laith Khalaf sought to explain the contradiction in some areas whereby prices have lowered recently, yet contribute to overall inflation. That is due to a discrepancy in timelines.
“Prices actually went down in January, but inflation went up. This apparent contradiction can be explained by base effects: in other words, prices fell more last January, leading to a lower base level for comparison. CPI fell by 0.1 per cent in the month to January 2025, but rose by 3 per cent year on year.
“Inflation is now 1 per cent away from target and heading in the wrong direction, and consumers better buckle up for prices to trend higher throughout this year. The Bank of England reckons inflation will hit 3.7 per cent in the third quarter, and that’s without a potential tariff shock stemming from US trade policy.”
David Hollingworth of L&C Mortgages pointed out that no likely interest rate cut means the best mortgage deals around at the moment “could be short-lived” due to strong demand from borrowers and buyers, while Alice Haine, personal finance analyst at Bestinvest, pointed out the additional cost pressures families will be facing soon.
“An uptick in the headline inflation figure will certainly be worrying for households who may be fearing a return to the dark days of rapid price rises that devastated household budgets during the cost-of-living crisis.
“Household budgets are already set for a heavy hit in April when household bills such as energy, water and council tax jump up again. For retirees on fixed incomes, who have also been hit by the Government’s decision to scrap winter fuel payments for all but the poorest pensioners, times may feel very tough.”
