Pressure for interest rate hikes returns to the Bank of England? Middle East conflict may cause food inflation to triple, possibly surging toward 10% by year-end.

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The UK food industry is facing a severe inflationary shock triggered by the Middle East conflict. The Food and Drink Federation has warned that disruptions in supply through the Strait of Hormuz and soaring energy costs may cause the year-end food inflation rate to surge from its current level, creating double pressure for consumers and producers.

The federation's latest forecasts show that food inflation could reach 9% to 10% by the end of 2026, far surpassing the previously expected 3.2%, meaning it could nearly triple in one year. The federation had previously predicted that inflation would ease this year.

According to data from the British Retail Consortium, the UK's food inflation rate in March was 3.4%, falling slightly from 3.5% in February. However, with the worsening situation in the Middle East, the inflation outlook has dramatically reversed. If food inflation rises sharply, pressure for the Bank of England to raise interest rates may re-emerge.

Strait of Hormuz and Energy Costs as Core Risks

The Food and Drink Federation represents thousands of food and non-alcoholic beverage manufacturers, including members such as Mondelez International, maker of Oreo, and Nestlé UK, maker of KitKat. The federation pointed out that the industry is particularly sensitive to supply disruptions through the Strait of Hormuz and rising energy costs.

In terms of energy costs, medium and large producers are facing price increase pressures from contract renewals, while small manufacturers who purchase directly on the spot market have already felt the impact first. Meanwhile, UK exporters to the Middle East have been forced to suspend or cancel shipments, resulting in sales losses and further increasing market uncertainty.

It is worth noting that these inflation forecasts are based on two assumptions: the Strait of Hormuz will reopen in the next few weeks, and energy production in the region will return to normal within a year.

Transmission Threshold: Food Inflation Pressures the Consumer Side

The federation's chief economist Liliana Danila said in a statement: “The current situation is unprecedented and hard to predict. However, given the scale and speed of the cost increases, despite companies’ efforts to avoid passing on the pressure, food inflation is set to rise over the coming months.”

This statement implies that the previous strategy of suppressing terminal price increases by compressing profits is approaching its limit, and the pressure for price transmission is gradually shifting towards the consumer side.

The potential spike in food inflation poses an upward risk to the overall UK inflation trend. Last month, the Bank of England projected that overall inflation in the UK would run between 3% and 3.5% in coming quarters. If food inflation rises sharply as expected, it will constrain monetary policy paths and increase decision-making difficulty for the Bank of England.

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