Supermarkets and other food retailers are “re-engineering” products to counter the rising cost of imports in the wake of Brexit, according to the Bank of England.
Sterling plummeted 10% after the vote to leave the European Union in June, making imported ingredients more expensive.
Customers are more observant on price changes than they are on the size of food packets so retailers are planning to shrink them and use cheaper ingredients to maintain profit margins, The Telegraph reported.
“Retailers were very cautious about any increases in prices, given that consumers remained highly price sensitive, and so the extent and timing of pass‑through would largely depend on competitors’ actions, particularly in food retail,” the Bank of England said in its survey of business conditions.
“Some food retailers were re‑engineering products to maintain existing prices. In non‑food goods, some retailers were starting to increase prices in response to rising material costs, particularly for products sourced in US dollars, but the impact was expected to be seen more fully through 2017,” said the Bank.
Here is the chart of how Brexit has led to more expensive imports:
The central bank said the sterling's sudden fall in value against other currencies took companies by surprise. Many failed to properly hedge the risk of a falling currency in the wake of the Brexit vote, which could lead to even higher prices for the consumer.
Here is the BOE (emphasis ours):
"Further cost increases were expected over the next twelve months as supplier contracts were renewed and pre‑referendum hedging expired."
"There had been little evidence of greater than usual hedging of foreign currency exposures ahead of the referendum: if anything there were more reports of less hedging given expectations of a Remain vote, and in some cases protection had been bought for smaller moves than had actually occurred."