UK inflation falling to 3 per cent in January offers a welcome signal that price pressures across the economy are beginning to ease.

This is positive news for consumers, but for grocers and manufacturers operating on already thin margins, the slowdown introduces new pressures.

Slowing inflation may ease pressure on household budgets, but it also exposes structural cost challenges for retailers and suppliers, with business rates continuing to be a growing concern as revenue growth moderates.

Food and non-alcoholic drink prices rose by 3.6 per cent in the 12 months to January 2026, down from 4.5 per cent in December, while prices fell by 0.1 per cent month-on-month.

Categories including olive oil, flour and pizza saw notable price drops, while beef and veal, whole milk and chocolate continued to rise sharply, highlighting the uneven nature of food inflation across the sector.

Lower inflation does not mean lower costs

After several years of sustained price increases, the reality for many households is that food bills remain significantly higher than they were pre-2021.

As a result, consumer behaviour continues to reflect caution, with shoppers prioritising essential spending and remaining highly price sensitive.

Dr Liliana Danila, lead economist at the Food and Drink Federation (FDF), says the latest figures should be viewed in context.

“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.”

That vulnerability will continue to be a key risk for the grocery sector. Recent volatility in commodity markets has demonstrated how quickly costs can escalate, and climate-related disruption continues to pose a threat.

Danila warns that recent extreme wet weather in the UK could create further pressure in the months ahead, noting that the industry has already seen ingredient prices such as cocoa and coffee “skyrocketing” following supply shocks.

Business rates come into sharper focus

During periods of high inflation, rising prices and revenues can partially offset property-based taxation.

As price growth slows and volumes remain under pressure, business rates take up a larger share of operating costs. This is particularly acute in grocery, where large physical estates, distribution networks and high-value sites remain central to operations.

Unlike labour or procurement costs, business rates are largely inflexible, tied to property valuations rather than profitability. For supermarkets investing heavily in automation, sustainability initiatives and supply chain resilience, this limits their ability to respond to softer trading conditions.

The issue is compounded by changing shopping patterns.

While grocery has remained more resilient than discretionary retail, footfall has shifted permanently towards convenience formats and online channels, raising questions about whether the current property tax model reflects modern retail economics.

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Interest rates and fragile confidence

The broader economic outlook offers some potential relief. Many economists now expect the Bank of England to begin cutting interest rates this year, with markets increasingly pricing in a possible move as early as March.

Andrew Phillips, managing director of V12 Retail Finance Limited, described the fall in headline inflation as “a welcome sign that price pressures are gradually easing across the UK economy”, but cautioned against assuming conditions have normalised.

“While the rate of increase has slowed, the cost of living remains significantly higher than just a few years ago, with essentials like food, services, and housing still rising faster than the headline rate.”

For grocery retailers, this means consumer caution is unlikely to disappear quickly. Phillips added that household budgets remain under strain, meaning affordability and flexibility continue to shape spending decisions, a trend reflected in ongoing demand for value ranges, promotions and own-label products.

A difficult transition period

It’s clear that inflation is moving in the right direction, but the environment remains challenging for grocers. Lower price growth reduces immediate pressure on consumers but removes the inflationary tailwind that helped offset rising operating costs.

As a result, profitability will increasingly depend on operational discipline rather than price increases. In that context, structural costs such as business rates (largely unchanged by shifts in consumer behaviour or economic conditions) risk becoming one of the defining challenges for grocery retailers in the year ahead.

The headline inflation number may be falling, but for the grocery industry, the squeeze is far from over.