This is the main finding in new research by IFS researchers, funded by the Nuffield Foundation and the Economic and Social Research Council.
Using real-time data on millions of grocery transactions (covering food, drink, toiletries, cleaning products and pet food) up until 17 May, the analysis shows that:
Month-to-month inflation for groceries in the first month of lockdown was 2.4%, a rate over 10 times higher than in preceding months, unprecedented in prior years, and more than we normally get in a year. The increase in prices coincided with the first week of lockdown; since then, prices have fallen slightly, but they still remain over 2% higher than pre-lockdown.
A 15% fall in the frequency of promotions accounts for over half of the inflationary spike. This fall in promotions is in contrast to the Great Recession, during which consumers purchased more goods that were on sale.
The beginning of lockdown also coincided with an 8% fall in the number of unique products bought per week by households in supermarkets, food and drink retailers, and convenience stores. This reduction has persisted in subsequent weeks and indicates that the set of products available to consumers shrank, even though most shops remained open in this sector of the economy.
This work measures inflation for groceries, not all goods and services. The Office for National Statistics (ONS) measures economy-wide inflation through the Consumer Prices Index (CPI). Unlike the ONS, we use a disaggregate data set that allows us to observe changes in household spending for disaggregate products and to take account of quantity promotions (such as ‘buy one get one free’ or ‘three for the price of two’). This enables us to provide a detailed picture of the inflation experiences of households in this important sector of the economy.
Household-specific inflation rates, which are based on the basket of goods each individual household buys rather than the average basket across all households, also show a marked increase compared with previous years. In 2018 and 2019, around half of households experienced a reduction in the cost of the basket of groceries they bought in the first five months of the year. In contrast, over the same period in 2020, almost all households (96%) saw prices for their grocery basket rise.
The inflation spike is widespread across different product types. Of 261 different product categories, 87% became more expensive at the onset of lockdown. That compares with an average of just 46% that became more expensive over the same period last year.
Martin O’Connell, Deputy Research Director at IFS and an author of the research, said:
“There was an unprecedented increase in the price of groceries at the beginning of lockdown fuelled by a fall in promotions, and that coincided with a reduction in product variety. As a result, there was more grocery inflation in one month than we often see in a year. Higher prices and reduced variety have persisted in the following weeks. At a time when many households are subject to reductions in their income, higher prices for food, drinks and household goods will further feed into squeezed household budgets.”
Xavier Jaravel, an Associate Professor at LSE and another author of the research, said:
“At a time when financial markets expect the COVID-19 pandemic to be a disinflationary shock, this increase in the price of groceries, which was experienced by almost all households and in almost all product categories, suggests policymakers nonetheless should remain vigilant about the prospect of higher inflation, at least for some goods and services.”