First petrol, then energy – now food prices skyrocket

(ALAMY)

Food prices are set to spiral in the new year on the back of soaring commodity costs, exacerbating the squeeze on household budgets that have already been hit by higher petrol and energy bills.

Inflation statistics released by the Office for National Statistics show food prices rose by 1.6 per cent last month, an annualised rate of 19.2 per cent, the fastest rise since the 1970s.

Growing populations, rising affluence in Brazil, Russia, India and China, and crop failures caused by extreme weather have pushed up the prices of wheat, sugar, cotton and many other household staples.

So far, bread, breakfast cereals and clothing have become more expensive – but the full effects of the cost of raw materials have not yet filtered through to shops, meaning they are likely to rise sharply in the coming months. Wheat, for instance, is up by 69 per cent this year, while many other commodities have risen sharply on an annual basis. Coffee is up by 48 per cent, potatoes by 47 per cent, cocoa powder by 32 per cent and sugar by 23 per cent, according to the commodities and raw-materials company Mintec.

Aside from cotton – which has doubled in price after decades in the doldrums – the biggest single rise has been in orange juice, which has jumped by 70 per cent, sending the supermarket price of a litre of Princes up by 54 per cent from 92p to £1.42.

Some commodities have fallen, such as milk powder, down 9 per cent, and cocoa beans, down 16 per cent, as fears about political instability in Ivory Coast have faded – but they have not been enough to offset rises elsewhere.

Although speculators have been blamed for fuelling the rises, commentators say the main cause is an imbalance in faltering supply and rising demand.

Freak weather has worsened the situation. Below-freezing temperatures have severely damaged the sugar cane crop in Florida, coming on top of smaller-than-expected harvests in Brazil, Europe and Russia. Coffee prices closed at their highest price in 12 years last week, as a result of poor weather in Vietnam and torrential rains in Colombia, the world's biggest producer of arabica beans.

Cotton has doubled in price this year, following crop failures in two key producers, China and Pakistan, caused in Pakistan's case by severe flooding.

The UN Food and Agriculture Organisation says there is no doubt that the longer-term trend for food prices is for them to rise. "Almost all commodities are in a tight supply-demand situation, and so we would need to see high production in all commodities, which is unlikely," said Abdolreza Abbassian, secretary of the Intergovernmental Group on Foodgrains.

Among the companies that have warned they will be unable to avoid passing on rises are Premier Foods, which owns Hovis, the Anglo-Dutch household products group Unilever, and coffee-to-cheese giant Kraft. Clothing retailers Primark and Zara have indicated the era of low-cost fast fashion may be over.

Under-pressure households are likely to find other bills rising in 2011 too: wholesale gas prices have hit their highest level for two years. Petrol prices reached a record of 122p a litre earlier this month, taking an extra £2.9bn a year from consumers compared with last December, according to the AA.

The rises are likely to put further pressure on the Retail Price Index, currently well above target at 4.7 per cent, which might cause the Bank of England to raise its base rate from the historic low of 0.5 per cent – adding hundreds of pounds a month to mortgages.

Consumers are likely to find 2011 is a tough year. VAT is set to rise to 20 per cent in January, although this will not affect most food and children's clothing, which are zero-rated.

Tens of thousands of public-sector jobs are also expected to be lost as the Government cuts public expenditure in the hope the private sector will step in to drive growth and employment.

The big squeeze

Wheat

So many products are made from wheat – bread, pasta, breakfast cereals – that a price rise can have a dramatic effect. Mysupermarket.co.uk says the price of an 800g loaf from the UK's biggest baker, Warburtons, has risen 8 per cent from £1.24 last year to £1.34 this year. A pack of Kellogg's Crunchy Nut Cornflakes is up 3 per cent from £2.88 to £2.96.

Coffee

Processors such as US company Kraft have put up the price of brands such as Maxwell House following a jump in the price of unprocessed "green coffee", which has risen 48 per cent this year as a result of bad weather.

Sugar

A shortfall in production in Latin, Central and North America, and Europe has been only partially offset by a better-than-expected harvest in India. Year on year, sugar is up 23 per cent and molasses up 13 per cent.

Potatoes

Potato prices have jumped sharply as a result of the snow, which has disrupted supplies in Britain. The Potato Council's GB free-market average has hit £170 a tonne, almost £81 higher than the same week last year.

Cotton

Poor crops in China and Pakistan have helped double the price of cotton in the past year. Fashion retailers will have to mark up garments.

Chocolate

Prices of cocoa beans have fallen from a summer high but powder used in hot chocolate is up 32 per cent this year.