Food inflation eases, but factory costs keep biting

Food and non-alcoholic drink inflation slowed to 3.6% in January 2026, down from 4.5% in December, and prices fell 0.1% on the month. For shoppers, that comes with a sense of relief. For manufacturers, however, it reads like a quieter week on a production schedule that has been running hot for three years, because the headline rate has come down faster than the underlying cost base has corrected.

The comparison that frames the last three years is stark. UK food inflation hit around 19% in early 2023, a level not seen since the late 1970s. Across the euro area, the equivalent basket — food, alcohol, and tobacco — ran in the mid-teens in 2023 and has since dropped to low single digits by early 2026. Both sides of the Channel may be on the same trajectory, but the route has been messy, with 2025 reminding everyone that down does not mean stable.

That instability is visible inside the basket. In January, some categories were falling sharply year-on-year — olive oil, flours and other cereals, and pizza and quiche among them — while other categories were still accelerating, including beef and veal, whole milk, and chocolate. For manufacturers, that divergence is the operational reality: it is hard to manage inflation when input costs and category pricing are pulling in opposite directions, and when customers expect list prices to behave as though the whole market is moving in one neat direction.

The Food and Drink Federation’s comment on the January data leans into that fragility, with a warning that lower inflation does not automatically mean lower risk. Dr Liliana Danila, Lead Economist, The Food and Drink Federation, (FDF), said: “It’s positive to see a lower rate of food inflation in January, however it still remains a real worry for household budgets and above long-term averages.

“After many years of rising costs, businesses across the supply chain have had their margins eroded, leaving manufacturers particularly susceptible to the supply chain shocks caused by geopolitics or climate change. We’ve previously seen the impact that this can have on inflation, with prices of ingredients like cocoa and coffee skyrocketing, so the UK’s recent extreme wet weather flooding farms is a concern for the year ahead.

“To help stabilise food inflation in the long term and protect shoppers from future price spikes, government must incentivise investment in business resilience.”

FDF’s own survey evidence supports the eroded margins point. Over the past two years, manufacturers have faced stretches where production costs rose faster than selling prices, and the gap was covered through a mix of productivity gains, pack and spec changes, and taking less profit. None of those levers is infinite. When margins are thinner, the factory’s ability to absorb a spike in a single input — whether that is cocoa, dairy, or meat — collapses quickly, and even small disruptions start to show up as emergency buying, short-notice reformulation, and increased waste.

The heat’s still on

Then there are the costs that do not politely reverse when inflation falls; labour being the obvious one. Food manufacturing remains operationally labour-intensive in many categories, and wage floors and skills shortages hit plants regardless of whether retail inflation is running at 3.6% or 13.6%. Energy is another. Even where wholesale markets stabilise, the reality for many sites is contract timing, network charges, and the simple fact that electricity-heavy processes, from chilling to baking, do not become cheaper just because CPI has eased. Add compliance overheads, from packaging reporting to ever tighter quality and traceability demands, and “normal” starts to look expensive.

If the 2022–23 shock was about broad-based inflation, 2024–26 has been about volatility. Cocoa is the cleanest illustration because the consumer signal is visible in chocolate pricing, but the same pattern has been seen across coffee, olive oil, and several animal proteins, with abrupt swings driven by weather, geopolitics, and supply concentration. Manufacturers can hedge some exposure and renegotiate some contracts, but they cannot redesign a product portfolio overnight, and they cannot switch suppliers freely when specifications, allergens, and audit requirements are built into customer approvals.

Climate-linked disruption has also become a near-term planning problem, rather than a long-term ESG slide. Persistent wet weather and flooding risks in the UK can affect domestic output, quality, and logistics, but they also add to a wider European picture of unpredictable growing conditions. That feeds directly into procurement complexity, and into the kind of price moves that appear sudden at retail, but have usually been building for months through constrained supply and higher losses.

So the real question for 2026 is not whether inflation is falling, but what manufacturers can afford to do about the next shock. Resilience, in practical terms, is capex and process change: energy-efficiency upgrades, heat recovery, refrigeration modernisation, automation where volumes justify it, supplier diversification, and product designs that tolerate substitution without breaking safety, quality, or brand promise. Those are industrial decisions, and they require cash, engineering time, and board appetite in a sector that has spent several years firefighting.

January’s 3.6% figure is welcome, but it is not the end of the story. It is a lower headline sitting on top of a cost structure that remains elevated, and a supply chain that is still one bad harvest, one disrupted shipping route, or one commodity squeeze away from turning easing inflation into another round of uncomfortable conversations about price, margin, and who can absorb what.