British households face at least two more years of steep food price rises on top of a sharp jump in energy bills this winter, according to new industry forecasts, deepening the cost of living squeeze under Prime Minister Andy Burnham.
Food inflation could hit 6.6 per cent in 2027 and remain almost as high in 2028, according to a bleak industry forecast, while separate analysis published Monday predicted that already-high energy bills could rise by 25 per cent in January.
Official figures also showed pay growth of just 2.9 per cent, barely keeping pace with rising prices, except in the public sector, where pay is rising by an average of 6.3 per cent.
The figures add up to a bitter first winter for Burnham, who came to power with a pledge to give "breathing space" to struggling households. Inflation figures due Tuesday are expected to show the rate climbing above 3 per cent, meaning millions of workers are now seeing their pay grow more slowly than prices.
Grocery bills set to accelerate
The Institute of Grocery Distribution (IGD), a trade body representing the food and grocery industry, forecast that the increase in the cost of the supermarket shop is set to accelerate, in a blow to families after inflation eased earlier this year.
The IGD predicted food inflation of between 2.9 per cent and 3.9 per cent this year, rising to between 5.6 per cent and 6.6 per cent in 2027. For 2028, it forecast inflation of between 5.3 per cent and 6.3 per cent.
Earlier this year, retailers had kept prices down by buying stock in advance, while food supplies were plentiful and demand was moderate. But IGD chief economist James Walton said the impact of higher energy prices and extreme weather events such as El Nino had been "delayed, not removed."
"Shoppers have already adapted to repeated periods of high food price inflation," Walton said. "Many have changed how and where they shop, switched products or reduced discretionary spend, leaving fewer options available to absorb any further price rises."
Energy bills to climb further
Energy bills, already set to climb to a three-year high in October, look on course to rise even further in January as continuing conflict in the Middle East pushes up global gas prices.
Experts at Bloomberg Economics predicted Monday that the energy price cap set by regulator Ofgem will rise by 25 per cent at the start of the year, lifting typical annual bills by £427 to £2,150 just as the cold weather sets in.
Ofgem sets the price cap that limits how much energy suppliers in Great Britain can charge customers on default tariffs, and it is reviewed periodically to reflect wholesale market costs.
Fuel prices at multi-year highs
The squeeze is being compounded by rising fuel costs driven by surging oil prices. Figures from the RAC on Monday showed average petrol prices had climbed past £1.70 a litre, the highest level since August 2022. Diesel rose to nearly £1.93 a litre, the highest since July 2022.
"Unfortunately for hard-pressed drivers, prices look set to keep on rising due to the cost of a barrel of oil consistently trading over the $100 mark," said Simon Williams, the RAC's head of policy.
Pressure builds on interest rates
For home owners, there could be worse to come, as the inflation squeeze puts the Bank of England under pressure to raise interest rates.
The Bank of England, which sets UK monetary policy through its Monetary Policy Committee, is expected to leave its benchmark rate on hold at 3.75 per cent when it announces its latest decision Wednesday. Markets are betting on five rate hikes by the end of 2027, which would take the rate to 5 per cent.
Little room for tax relief
Any attempt by the prime minister to cushion the blow of higher living costs is likely to be hampered by Britain's deteriorating fiscal situation.
Bond markets have sent government borrowing costs soaring, narrowing the scope for extra spending at next month's Budget, when Chancellor John Healey will already be trying to find funding for defence, social care and council house building plans.
That may mean the burden falls once again on taxpayers, even after £75 billion of tax increases introduced under Healey's predecessor, Rachel Reeves.
