Key takeaways:
- Rising energy and input costs are colliding with softer consumer demand, creating a more complex challenge than inflation alone.
- Food manufacturers are losing pricing power as consumers trade down, forcing tougher decisions on margins, promotions and investment.
- If stagflation takes hold, businesses will need to manage both cost inflation and demand weakness at the same time, with limited room for error.
Stagflation is one of those economic terms that tends to stay in textbooks – until it doesn’t. Right now, it’s edging back into real-world conversations, not as a theoretical risk but as something beginning to show up in the data. It usually surfaces when the signals stop lining up – when prices are still climbing but growth begins to stall. And that tension is starting to rear its ugly head.
Energy markets have tightened again as conflict in the Middle East feeds through to oil, with Brent crude moving back above $90 a barrel. At the same time, inflation hasn’t eased as quickly as many had hoped, while growth forecasts are being nudged down rather than up. On their own, each of these would be manageable; together, they create a more uneasy backdrop.
Economists are already adjusting their outlooks. Analysts at S&P Global say inflation expectations have been revised upwards, while growth projections have been trimmed ‘pretty much across the board’ as geopolitical risks intensify.
That broader shift frames recent comments from Phillip Braun, clinical professor of finance at the Kellogg School of Management, Northwestern University. “Stagflation is when the economy is stagnant and inflation is rampant,” he told Kellogg Insight, describing it as a situation where “the sum of two negatives equals three negatives.”
The comparison he draws isn’t especially reassuring. The US has largely avoided stagflation since the 1970s, when oil shocks fed into a prolonged stretch of high inflation and weak growth. Similar concerns surfaced during the COVID recovery but didn’t quite take hold.
Now, they’re back on the table. Having dismissed the likelihood of stagflation in 2022, Prof Braun is more cautious. “Today’s environment is more like the 1970s than four years ago,” he said. “The environment is ripe for stagflation with this oil-price shock.”
He’s not alone with his views. Diane Swonk, chief economist at KPMG, has warned that escalating tensions in the Middle East have “significantly heightened the risk of global stagflation,” particularly through disruptions to energy and fertilizer markets. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, has also cautioned that when inflation is driven by supply shocks and labour markets begin to cool, central banks are left with fewer effective options.
Cost pressure is coming from all directions
Cost inflation isn’t new for food manufacturers. What feels different now, however, is how widespread it is.
Energy sits at the centre of the current cycle. When oil and gas prices rise, the effect spreads quickly. Fertilizer costs increase, which feeds into crop production. Packaging becomes more expensive. Production itself becomes more expensive, particularly in operations that depend heavily on heat or refrigeration.
The impact is showing up across key indicators. The Food and Agriculture Organization (FAO) reported a 2.4% increase in its Food Price Index in March 2026. Cereals rose by around 1.7% month-on-month, influenced in part by higher energy and fertilizer costs. Wheat markets are tightening as planting decisions respond to those inputs.
The macro backdrop points in the same direction. The International Monetary Fund (IMF) has said the current geopolitical environment is likely to result in “higher prices and slower growth.” The Organisation for Economic Co-operation and Development (OECD) now expects G20 inflation to reach 4.0% in 2026 – about 1.2 percentage points higher than previously forecast – while also lowering growth expectations.
Manufacturing data tells a similar story. UK factories recorded their steepest rise in input costs since 1992 in March, largely driven by energy and transport. Output has edged into contraction. Across the eurozone, input cost inflation has picked up again even as demand indicators soften.
This isn’t a situation where one cost spike can be offset elsewhere. Multiple pressures are building at the same time, which makes balancing them more difficult.
What is stagflation?
Stagflation is when high inflation coincides with weak or slowing economic growth.
Normally, inflation falls as demand weakens. Stagflation breaks that pattern, with prices continuing to rise even as the economy stalls.
It’s often triggered by supply shocks, such as spikes in energy or raw material costs, which push up prices while weighing on growth.
It creates a difficult squeeze for manufacturers: costs rise across inputs, but demand weakens at the same time, limiting how far price increases can go.
The term is most closely associated with the 1970s oil crisis, when energy shocks drove a prolonged period of high inflation and slow growth.
The demand side is where it gets tricky
The industry has spent the past few years dealing with rising costs and, in many cases, passing them through.
That becomes harder when consumers start to push back. Data from the United States Department of Agriculture (USDA) shows food prices in the US rose 3.1% year-on-year in early 2026. Some categories are rising faster – sugar and sweets are up around 9.0%, while non-alcoholic beverages have increased by roughly 5.6%. After successive price increases, consumers are becoming more selective.
That shift is evident in company performance. PepsiCo has reduced prices on certain snack lines by roughly 10%-15% following weaker volumes in North America. Mondelez International has reported volume declines of around 2%–3% in parts of its portfolio. The Hershey Company continues to face elevated cocoa costs, which surged more than 150% year-on-year at one stage, limiting pricing flexibility. And Nestlé has also flagged low single-digit volume declines in some categories as consumers trade down.
This is where the balance becomes harder to manage. Pricing is still needed, but it doesn’t land in the same way. Consumers adjust – sometimes subtly, sometimes more quickly. They switch brands, buy less or move to cheaper options. Retailers push harder in negotiations. Promotions start to return, even though they eat into already tight margins.
Dairy illustrates how uneven this can be. In the UK, farmgate milk prices have fallen by up to 40% between October 2025 and early 2026 due to oversupply. Processors, meanwhile, continue to face higher operating costs. That gap is difficult to close.
Managing both sides at once is the real challenge
Stagflation complicates decision-making because the usual levers don’t align. Raising prices risks losing volume. Holding back compresses margins. Cutting costs comes with trade-offs. Investment becomes harder to justify when demand is uncertain.
Pressure doesn’t land in just one part of the sector. It shows up across all of them, just in slightly different ways. Bakery and snacks face higher wheat, oils and packaging costs while also dealing with stronger private-label competition. Beverage companies are balancing packaging inputs and ingredient volatility with more cautious consumers. Confectionery remains exposed to cocoa and sugar dynamics, with limited room to keep increasing prices. Dairy continues to operate between volatile farmgate prices and persistent processing costs.
What follows is rarely a single decisive move. It tends to be a series of smaller adjustments – pricing changes, pack-size tweaks, tighter sourcing, more selective investment.
To compound it, there’s also the question of policy. In the 1970s, attempts to cushion the impact of an oil shock ended up fuelling inflation further. With Jerome Powell’s term at the Federal Reserve nearing its end, the direction of monetary policy is less certain. A more accommodative approach, some economists warn, could risk repeating earlier mistakes.
If that happens, the margin for error narrows further. And, as Prof Braun put it, businesses should expect “rising prices across the board and reduced demand”.
In other words, batten down the hatches and prepare for a tougher stretch ahead.
