Climate, Fossil Fuels and UK Food Prices.

Abstract

Food price inflation has been-and continues to be-a major concern for UK policymakers as high food prices - together with high energy and fuel costs - were a significant feature of the cost-of-living crisis that has impacted on UK households particularly those on low incomes. Although there are many drivers of consumer food prices, the cost of energy inputs and extreme weather were shown to account for the lion-share of the rise in food prices experienced in the UK in 2022. Over the past year, developments in global and domestic energy markets have changed, thus ameliorating one of the main pressures on UK food prices. In 2023, we anticipate falling energy prices to act as a brake on food price growth. However, extreme weather continues to be an important driver with global temperatures in 2023 exceeding previous records. This rise in global temperatures – with resultant droughts, flooding, lower yields – directly affects global agricultural production. Our updated estimates show that the decline in energy costs have contributed to reducing the pressure on consumer food prices but this effect has been offset by the impact of rising global temperatures. Taken together, these two factors have accounted for a 2.6 percentage point cent rise in UK food prices, translating to a £97 annual increase in the average household spending on food in 2023. However, falling energy prices obscures the impact of rising temperatures; in the absence of the decline in energy costs, UK food prices would have increased by by £192 or 5.2 per cent, slightly higher than the contribution to UK food price levels in 2022. Estimates suggest that climate change induced extreme weather is likely to account for around one-third of the food inflation experienced in 2023. Combining the impact of energy costs and climate change across 2022 and 2023, these two factors have increased household food bills by an average of £605, with climate costs alone accounting for 60% of this increase, or £361 for each household. Although our focus is on the UK and updating the estimates from our previous analysis, this report highlights that the issue of food price inflation is a global concern impacting on both developed and emerging economies. We highlight recent research that addresses the links between extreme weather and price stability more generally, with the main pathway linking climate change and macroeconomic stability being via the effects of extreme weather on food prices. This not only reflects the importance of food in consumer spending but its role in forming expectations that feed into wage bargaining (so called ‘second-round’ effects). With the projected adverse effects on global agriculture from what is predicted to be a strong El Niño (warm phase of global temperature) in 2023 and 2024 compounding the underlying trend in global temperatures, the nexus between energy, extreme weather and domestic and global food prices will be of heightened concern to policymakers in both developed and emerging economies for some time to come.