Explaining UK Food Price Inflation. (Transparency of Food Pricing (TRANSFOP) Working Paper 1)

Retail food price inflation in the UK peaked at nearly 14% in the summer of 2008, a level much higher than had been seen in the previous 10 years and, since then, food price inflation has continued to lead general inflation. An obvious factor driving domestic retail food prices is world \ncommodity prices, but other factors matter too. In this paper, we model UK food price inflation and explore a range of potential drivers including world food prices, exchange rates, manufacturing costs, oil prices and wages. Over the \nperiod 1990-2010, we show that the major drivers of UK food price inflation are world raw food prices and the exchange rate; less important are manufacturing costs, unemployment and earnings. Oil prices matter too but indirectly via their effect on world agricultural commodity prices. We also show that the effect on domestic retail food price inflation depends on the duration of the shocks arising on world commodity markets.