UK shop price deflation deepens as food costs fall

http://www.theguardian.com/business/2015/mar/04/uk-shop-price-deflation-deepens-as-food-costs-fall

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High street price cuts deepened last month as fresh food costs dropped at the fastest pace for at least eight years, according to industry figures that will reinforce expectations the UK is headed for a brief period of deflation.

The British Retail Consortium reported deflation in overall shop prices for the 22nd consecutive month, as prices in February fell 1.7% on a year ago. That followed deflation of 1.3% in January.

Non-food products again drove the overall drop, helped by clothes discounts and special offers on furniture and DIY items, the BRC said. Non-food items were down 2.5% on the year, the biggest drop for eight months.

Food prices also fell in February, signalling a change of trend after they had risen throughout much of last year. In February, they were down 0.4% against a backdrop of falling commodity prices, such as sugar and corn, and as a price war between supermarkets continues.

Almost two years of falling shop prices

The BRC director general, Helen Dickinson, predicted more discounting ahead:

The fiercely competitive market will see retailers continuingly responding to their customers with keen prices and promotions to maintain market share.

With milk, cheese, eggs, vegetables and convenience food all cheaper than they were a year ago, fresh food prices were down 1.2%, the deepest deflation since the BRC shop price index began in December 2006.

Food prices drop, mirroring commodities fall

The survey’s co-authors, Nielsen, said with many commodity prices still falling, retailers will be hoping to increase sales volumes to help revenues hold up.

The challenge for food retailers is that in store promotions also remain close to an all-time high at 33% of sales and the use of vouchers or coupons continues, making consumer demand rather unpredictable. Even so, shoppers are seeing a double benefit of price cuts and promotional offers,” said Mike Watkins, Nielsen’s head of retailer and business insight.

The news of sharper shop price falls follows official figures showing UK inflation fell to the lowest level on record in January at 0.3%. That much wider measure of price movements in the UK economy from the Office for National Statistics showed fuel and food prices were behind the slowdown in inflation.

Economists say there is little sign that low inflation is becoming entrenched, but that in coming months the UK will probably slip into its first bout of negative inflation in more than half a century.

Related: Incomes rise but working-age households remain worse off

The chancellor, George Osborne, has sought to flag up the relief low inflation brings to households and rebuff suggestions that the UK faces any real threat of a deflationary spiral.

Cheaper clothes, electricals, carpets and DIY tools

The BRC, which tracks 500 of the most commonly bought high street products, highlighted several items that now cost less than a year ago. Aside from many fresh foods, prices were also down for cereal, electrical goods such as TVs, carpets, DIY tools and children’s and women’s clothing – as cotton prices fell almost a third over the past year. Books and newspapers were among the few categories where prices were up.

There’s an awful lot of coffee in Brazil

The BRC also singled out coffee prices, which it says are up on the year but have fallen sharply in recent months. The report added:

Coffee prices have fallen quite dramatically in February, as continuing rains in Brazil dampened worries of a large shortfall in Arabica beans. Prices have fallen 38% since their recent peak in October 2014 when drought conditions in Brazil caused prices to soar.

Oil price bounce pushes petrol higher

The industry group said that although oil prices rebounded in February the drop before then had yet to fully feed through the supply chain. So there was unlikely to be any impact from February’s bounceback in crude prices on overall shop prices in the medium term, it added.

The AA said on Tuesday, however, that the latest pick-up in oil prices was already being seen at the petrol pump.

The motorists’ organisation said average UK petrol prices were back above 110p a litre after falling below that level just two months earlier at the start of January.

Edmund King, the AA’s president, said drivers fear another spike in oil and pump prices. He added:

Just when drivers and businesses hoped that there might be some stability in petrol and diesel prices, commodity market greed has pushed up costs again and many petrol stations have wasted little time in passing them on.”