IFS warns of Brexit food price fluctuations

IFS warns of Brexit food price fluctuations

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As uncertainty over what the nature of the UK’s post-Brexit trading arrangements will be with possible impacts from tariffs and exchange rates, the Institute of Fiscal Studies warns that UK households face “considerable and unpredictable” changes in food prices.

The independent IFS poses the question “How might Brexit affect food prices?” in its latest report examining the potential for food price hikes in the months and years ahead.

It says that UK shoppers are potentially going to be affected “with the poorest households much more exposed to this risk than the richest households.”

Earlier this year Analysts Rabobank estimated fruit and vegetable prices could jump 8% once Britain leaves the EU, no matter what types of trade deals are struck.

However, the IFS report does not put a figure on any potential rise but does warn that Brexit has the potential to have a substantial impact on prices households pay for food because currently around 30% of the value of food purchased by UK households is imported, with the majority of those imports coming from the EU.

It is clear that Britain’s reliance on EU crops, including oranges, lettuce, tomatoes, peppers and many other salad crops and vegetables grown under glass, will be impacted.

Exactly how and by how much is not clear.

The fresh produce industry is still waiting for clarification over tariffs, border controls and other trade deal details. Potential price hikes could also be exacerbated by any future depreciation of the pound.

“The consumer price for food relative to the overall consumer price level initially declined after the referendum, but it started to increase moderately towards the end of 2016. The rise in producer prices since the referendum has been somewhat faster, however, and these costs are likely to be passed onto consumers in the future,” says the report.

“How food prices will change following the UK’s actual departure from the EU remains highly uncertain.

“Currently, the UK benefits from tariff-free trade within the EU, and the UK and other EU members levy common tariffs on products imported into the EU from other countries.”

It adds how these tariffs are, on average, higher on agricultural products compared with non-agricultural products.

The report notes that once the UK has left the EU, it is free to adjust the tariffs on agricultural goods. However, World Trade Organization (WTO) rules state that Britain would not be able to set tariffs that discriminate between trading partners, except as part of a free trade agreement or to give developing countries special access to its markets.

“If the UK and the post-Brexit EU fail to strike a free trade deal, it is likely tariffs would be imposed on EU imports into the UK, as the UK would be unable to impose zero tariffs on imports from the EU without also extending tariff-free access to all other WTO members,” the report adds.

“This would raise the price of food imported from the EU, which is the major source of food imports into the UK, accounting for 70% of gross food imports.

“Therefore if the UK did not strike a free trade deal with the EU, food prices would be likely to rise significantly.”

It adds how this could be less painful if Britain reduced tariffs across the board “by a substantial margin and/or decided to accept cheaper food imports that do not meet current EU regulatory standards.”

The cost of getting imported food onto supermarket shelves

Movements in exchange rates will also obviously impact food prices, says the report, but it’s not clear how possible tariff changes and currency movements would feed through to prices.

The price of home-grown and domestically produced products could also change, it says.

“First, any domestically produced products use imported inputs, and changes to firms’ costs will tend to feed through to the prices they charge for their final products.

“Second, changes in the price of imported goods are likely to lead to changes in the price of similar domestically produced goods because of competitive effects: for example, if the prices of imported goods rise, then domestic producers who compete in the same markets might take advantage of the opportunity to increase their prices too.”

Socio-economic groups & variation in food spending

The report also considers how future changes may affect different types of households; broadly speaking, poorer versus richer households.

“The first thing to consider is that lower-income households allocate a higher proportion of their spending to food than higher-income households (23% of spending for the lowest-income tenth of households versus 10% for the highest-income tenth). Poor households are therefore more exposed to rises in the general level of food prices,” it says.

However, low-income households may buy less imported food, it argues, and would therefore be less exposed to price rises driven by exchange rate or tariff changes.

“We show that there are big differences in import penetration between food groups – for example, 39% of fruit products are imported, while only 20% of bread and cereal products are imported.

“Additionally, using detailed spending data, we observe that some households spend a lot more on imported products within broad food groups than others do.”

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