By James Davey
LONDON, Aug 13 (Reuters) - Britain's food industry warned in February that soaring energy costs following U.S. and Israeli strikes on Iran could push food price inflation towards 10% by Christmas.
Six months later, food inflation has instead fallen to a near two-year low, as fierce supermarket competition, consumers' resistance to further price rises and better hedging by suppliers helped absorb the shock.
Supermarkets have stepped up their fight for market share, while suppliers caught
out by the inflation surge that followed Russia's invasion of Ukraine have locked in energy and ingredient costs further ahead.
Retailers, suppliers, investors and analysts say those changes, together with cost-cutting programmes to offset higher wage, tax and regulatory costs, have helped the industry weather the latest geopolitical turmoil.
Rather than approach 10%, UK food and non-alcoholic beverage prices rose 1.7% in the 12 months to June 2026, down from 2.2% in May and the lowest rate since August 2024.
That was below the 3.6% forecast for June by the Bank of England in April and well below the more than 9% increase the Food and Drink Federation predicted for December.
While food inflation has also remained subdued in the euro zone, overall UK inflation has generally run higher than elsewhere in Europe, suggesting British grocers and suppliers may have absorbed more cost pressures.
That could offer some relief for UK households as new Prime Minister Andy Burnham makes tackling the cost of living an early priority.
"There's lots of things going on to manage cost push inflation and keep a lid on the price that the consumer sees on the shelf," Kunal Kothari, a fund manager at Aviva Investors, which owns shares in industry leader Tesco and number two Sainsbury's, said.
Morgan Stanley's UK economist Bruna Skarica said Tesco had managed to raise prices while growing market share in 2023 and 2025, but faced a much tougher environment this year.
COMPETITION HOLDS DOWN PRICES
Clive Black, head of consumer research at Shore Capital, who expects to lower the food inflation forecast he made in May, said supermarkets had sacrificed some profit to keep fresh and chilled food prices down, recognising that those categories play a key role in determining where consumers shop.
He said branded food manufacturers had also sought only limited price increases this summer, wary of accelerating the shift towards supermarkets' cheaper own-label products.
"The single biggest factor behind food inflation not progressing as strongly as we thought is the competitive intensity of the industry," he said.
Data from researcher Worldpanel by Numerator showed Tesco's market share edged lower in June and July for the first time since July 2023, suggesting even the industry leader is not immune to what CEO Ken Murphy calls Britain's "incredibly competitive" grocery market.
Tesco, Sainsbury's, Asda, Morrisons, Marks & Spencer and discounters Aldi and Lidl remain locked in a battle for shoppers, making them reluctant to pass on the full extent of rising costs.
A weekly pricing survey by trade publication The Grocer showed five major supermarket groups have each been the cheapest retailer at some point during the last 15 surveys, underlining the intensity of competition.
German-owned discounters Aldi and Lidl have also played a major role in holding down prices.
Supermarkets have had to work hard to retain customers after more than a decade of weak growth in living standards and a prolonged cost-of-living squeeze. According to Worldpanel, nearly a third of grocery sales were sold on promotion in the four weeks to June 14.
CUTTING COSTS TO HOLD PRICES
To keep prices down, supermarkets have embarked on major cost-cutting drives to offset rising operating expenses.
Tesco has delivered more than £2.2 billion ($3 billion) of savings over the last four years, helping fund lower prices for customers, and is targeting a further £500 million this year.
Savings have come from greater supply chain automation, while AI is helping optimise markdowns and reduce food waste.
Suppliers have also strengthened their defences against commodity and energy price swings since the inflation shock triggered by Russia's invasion of Ukraine.
"They've learnt their lessons," Tesco's Murphy told reporters. "People are a lot better hedged this time round," he said, adding that falls in soft commodity prices, including cocoa and coffee, had also helped.
PRESSURE ON PROFITS
But the industry is not escaping unscathed.
Tesco and Sainsbury's have both issued unusually wide full-year profit guidance ranges, with the lower end implying year-on-year earnings declines, indicating that while food inflation has remained subdued, profitability is under pressure.
The squeeze on margins raises questions about how long supermarkets can keep shielding shoppers from higher costs.
Britain's ongoing drought is also emerging as a fresh threat to food prices next year, underscoring how quickly the outlook could change.
($1 = 0.7399 pounds)
(Reporting by James Davey. Editing by Kate Holton and Mark Potter)
