Tesco chief executive Philip Clarke has warned that food prices are likely to rise in the long-term. Retail Week analyses what is driving the increase and what the implications are.

Philip Clarke’s proclamation that food prices will rise has been taken as a signal of the end of the ‘era of cheap food’ which Tesco and other grocers have championed for many years.

Clarke and his counterparts at the big grocers have long vowed to avoid if possible passing on rising commodity prices to consumers and fought to keep inflation low.

However, Clarke joins Waitrose managing director Mark Price in acknowledging that the race to the bottom on price is not necessarily the way to go. Food price inflation rose from 2.4% in May to 2.7% in June, according to the Office for National Statistics.

Clarke comments also came in the wake of changing consumer attitudes in the UK. While price remains as vital a part of grocery retail as trolleys and fridges, initiatives such as Sainsbury’s Brand Match and Tesco’s Price Promise have given consumers confidence that they will get good value pretty much wherever they shop. That means other factors such as quality, service and product range become all the more important.

Many shoppers remain highly sensitive to price. Aldi and Lidl have been notching up record market shares and their growth shows no signs of slowing.

However, it appears unlikely that food prices will spike upwards imminently. Shore Capital analyst Clive Black said that prices began to rise steadily in 2006, leaping sharply in 2008, but he expects them to ease to a “more sedate rate” in the coming year as the pressure from high cereal prices, and the resulting effect on prices of the livestock which feed on them, relaxes.

Black adds: “Offsetting this big picture development, oil prices have tickled up and the pound has weakened against the dollar, so there could be some upward pressure there.”

Black argues that it is hard to predict which particualr categories will become more expensive, with crops exposed to the vagaries of weather and natural disaster.

However, in the long-term the upward drivers of food prices are arguably too great for price tags not to become more expensive. Worldwide population is predicted to rise to between eight and nine billion by 2020 and the pressure of a greater number of people on the planet on the food supply chain is likely to step up accordingly.

While genetically modified food and improved efficiency through new farming techniques may provide a source of additional resources, changing diets – particularly in Asia – mean challenges for the supply chain will remain great.

Charles Allen, senior retail analyst at Bloomberg Industries, says: “The main upward driver on food prices is rising income and population. While many staples, for example rice and grains, seem to have more stable prices, a higher percentage of the global population is expecting more protein in their diet. Supply for many types of protein is less flexible, which puts upward pressure on prices.”

Black adds: “World stocks remain moderate and so supply shocks have a more or less immediate effect; this is likely to remain the case. Long-term technological progress in genetics, breeding, water requirements and trade restrictions should mean that the world will continue to feed itself as the population rises.

“In between there remains scope for volatility and so we agree with Philip Clarke that the general trajectory is more likely to be upward than downward.”

Additionally, as consumers shop for groceries more frequently at convenience stores, where prices are generally higher, the proportion of their budget spent on groceries looks set to rise.

The Asda Income Tracker, released today, shows disposable income in the average household is at £160 a month. That is flat on last year but £5 less than February 2010.

Allen argues that a reduction in food waste in the home, which retailers including Sainsbury’s and Tesco have been encouraging, may help consumers manage their budgets.