UK Economic Outlook Pessimistic

The latest Economic Viewpoint report, “What to Plan For in 2026,” from IGD (The Institute of Grocery Distribution, Watford, England) warns food and drink businesses will face another make-or-break year in 2026. Retail food inflation is forecast to remain persistent, only easing slightly.

At the same time, fragile shopper confidence, rising household taxes and geopolitical risks all threaten economic recovery. Businesses must prepare for a volatile environment where affordability and selective indulgence will define consumer behavior.

Here are some of our predictions for what to expect for the economy, consumers and government policy in 2026, through the lens of the food system, including possible implications for businesses.

KEY INSIGHTS

Inflation Outlook: Retail food inflation is expected to decline gradually (4.3% in 2025, 3.8% in 2026 and 3.3% by 2027), but geopolitical shocks could trigger fresh price spikes. Economic growth forecast is downgraded to 1.4% for 2026, with productivity at 0.7%.

However, comparing IGD forecasts food inflation with the U.K.’s Office for Budget Responsibility forecasts for general inflation, it is likely that food and drink will become more expensive in 2026, relatively speaking. This means that food and drink businesses will come under more scrutiny in the future by the government, media and influencers. Businesses must be ready to explain why prices continue to rise and be seen to be acting to protect consumer interests.

Consumer Pressure: 33% of shoppers plan to cut back on grocery spend in 2026, up from 28% in December 2024. For Away From Home (AFH), 45% of consumers plan to cut back spend in the next few months, versus 46% in December 2024. Economic pressures are expected to continue limiting volume demand for food in both retail and AFH for many years. Food businesses will become more vulnerable to any change in fixed costs, such as labor.

Businesses must prepare for a volatile environment in 2026.

Tax Burden: Household taxation will rise further in 2026, limiting disposable income and reinforcing value-driven shopping.

Opportunities: Despite caution, consumers will selectively trade up, especially during seasonal events like Christmas, creating growth pockets for businesses balancing value and premium. There may be some room to develop more premium retail sales as shoppers avoid eating out.

Rather than frequently changing product ranges or chasing small, short-lived opportunities, focus on operational efficiency, cost control, and protecting core business. Investments should be targeted and justified by clear, sustained demand, not by hopes of a rapid rebound.

NAVIGATING SUPPLY CHAINS

Supply chain risks from climate change and geopolitical tensions will persist in 2026. The U.K. food system — like the whole economy — remains highly exposed to external shock events. In another recent IGD report, “Supply Chain Trends 2026,” we identified four clear themes to take forward into action over the next few years:

Sustainability will remain an investment priority. Delivering a sustainable, robust operation remains a key trend for the supply chain; there will be an ongoing need to reduce emissions.

Secure supply chains will be foundational for future strategies. Supply chain security is becoming a critical concern, and logistics sectors that face heightened exposure to fuel and energy volatility. The risk of disruption must be embedded into strategic planning to safeguard continuity and resilience.

Technology will enable cost pressures to be mitigated. Companies are expected to put continued downward pressure on costs, which will have to be set against rising customer expectations. Automation and digitalization will be key enablers to delivering better metrics at lower costs.

Speed and flexibility become increasingly important in the last mile. Sustainability, security, and technological innovation remain essential, but they won’t satisfy evolving customer expectations alone. Success will depend on balancing these themes with greater flexibility, faster delivery, and personalized experiences that align with how customers choose to shop.

Taking prompt action to harden the U.K. food system against change will be expensive, but this cost would be dwarfed by doing nothing or even by delaying action.

By the end of 2026, the U.K. will be halfway through the current Parliament, President Donald Trump will be halfway through his second term, and devolved governments could look very different. Expect the government to accelerate policies and regulatory changes shaping food policy, which are forces businesses cannot ignore. Next year is likely to bring a push to implement key measures before the next general election, with food policy influenced by both government priorities and external pressures.

2026 will be a critical year for the food and drink industry. Businesses must stay relevant to value-conscious consumers while unlocking growth from resilient segments. Those able to deliver affordability alongside moments of indulgence will be best placed to succeed.

James Walton is the chief economist at IGD, and equips businesses to anticipate and deal with strategic change. For a deep dive into what 2026 will bring, across the economy, consumer sentiment and government policy, read the full IGD Viewpoint report at www.igd.com/social-impact/economics/reports/viewpoint-what-to-plan-for-in-2026/72126.