Food prices in Britain will not return to where they were before Russia's invasion of Ukraine because a permanent rise in labour costs will mitigate the easing of commodity and energy pressures, the boss of Sainsbury's (SBRY.L) said on Tuesday.
Prime Minister Rishi Sunak's pledge to halve overall inflation in 2023, before a probable 2024 election, is under threat from persistently high food inflation, which has added to strain on household budgets already hit by interest rate rises.
Food and drink inflation was running at 18.3% in May, according to the latest official data, and 14.6% in June, according to industry data.
Simon Roberts, CEO of Britain's second largest supermarket group, said food inflation was starting to fall and he expected it to continue to do so, but cautioned it would still be a challenge going forward as higher labour costs were now fixed into the operating models of food retailers and suppliers.
He said that while falls in commodity costs had driven recent price cuts in fresh food products, such as milk, butter, bread, pasta and rice, prices of packaged goods would be more stubborn.
"We should just remember that energy costs are still high and labour costs have been elevated permanently," he told reporters after Sainsbury's updated on first quarter trading.
"So we would expect inflation to continue to improve, but it's not going to go back to where it was before because the cost of producing food is clearly elevated from where it was a year or two back," he said.
Sainsbury's increased pay for its 127,000 hourly paid workers in February, taking the annual increase to 10%, while market leader Tesco (TSCO.L) raised hourly pay for its 220,000 store workers by 7% from April.
"The labour element of inflation is likely to stick," Tesco boss Ken Murphy said last month.
Bank of England Governor Andrew Bailey last month said rates of wage and profit setting by companies were "unsustainable" after the central bank raised interest rates by half a percentage point.
Annual growth in wages excluding bonuses rose to 7.2% during the three months to April, according to official data. Outside of the COVID-19 pandemic, when wage statistics were skewed by furlough schemes, it was the highest reading on record.
