Food and drink businesses, including bakeries, should expect another make-or-break year in 2026, amid persistent inflation and higher taxes.
The warning came as part of the Institute of Grocery Distribution’s (IGD) latest Economic Viewpoint report, entitled ‘What to plan for in 2026’.
Among the key predictions for next year was a slow decline of retail food inflation, going from an average of around 4.3% in 2025 to 3.8% in 2026 and 3.3% in 2027.
Around 30-40% of inflation pressure in 2026 will be a result of government policy interventions (especially around labour), with the rest coming from market forces such as rising energy and ingredients costs, noted the report.
In addition, conflicts continuing in many areas including the Ukraine, Sudan, and southeast Asia, as well as geopolitical shocks could trigger fresh price spikes.
While inflation will still have the biggest impact on consumer sentiment, higher taxes are to add further pressure to household incomes. The Office for Budget Responsibility (OBR) is predicting living standards, as measured by growth in real household disposable income per person, will fall from 3% in 2024/25 by around 0.25% a year over the next few years. This is well below the last decade’s average growth of 1% a year, noted the IGD report.
The flat-lining incomes has resulted in the OBR having an “extremely conservative” view on the economy. Productivity and economic growth in 2026 are expected to be lower than in previous OBR forecasts – productivity at 0.7% versus 0.9%, growth at 1.4% versus 1.9%.
The low growth and ongoing cost pressures mean the food sector needs to prioritise margin and volume. “There may be some room to develop more premium sales as shoppers avoid eating out,” stated the report. It also highlighted “pockets of opportunity” for retailers as some consumers trade up, especially for seasonal occasions like Christmas.
“2026 will be a critical year for the food and drink industry,” commented James Walton, chief economist at IGD. “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.”
Legislation to look out for
In its outlook of government policy, IGD reminded about the new UK-wide HFSS advertising restrictions taking effect from 5 January 2026, with work to implement measures to tackle obesity in the NHS 10 Year Plan set to commence as well.
Business are recommended to prepare for the Deposit Return Scheme and for new policy interventions as a result of the Circular Economy Strategy. There will also be new obligations in the Employment Rights Bill beginning to take effect, while tighter immigration rules will reduce access to labour and skills.
Lastly, UK businesses face new regulatory requirements as Sanitary and Phytosanitary (SPS) arrangements with the EU shift – this is aimed at reducing the burden of trading agricultural products. There are new deforestation reporting requirements too.
“By the end of 2026, we will be halfway through the current Parliament, Donald Trump will be halfway through his second term in office, and the political makeup of the devolved Governments across the UK could have completely changed,” wrote the IGD report.
“Next year is likely to see an acceleration of the policies the UK Labour Government wishes to see implemented before the next General Election, and for food policy to continue to be shaped by forces both within and outside Government control.”
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