Shop price deflation accelerates in spite of underlying price pressures

UK retailers reported increased price deflation in January, despite a rise in food prices as shops continue to see building cost pressures from the fall in sterling and higher commodity prices.

The BRC-Nielsen shop price index showed annual deflation of 1.7% in January, an acceleration from December's 1.4% fall.

On a month-on-month basis, prices were down 0.6% after the 0.2% increase in December.

January's yearly decline was led by clothing and furniture, furniture and floorcoverings, which dragged non-food deflation to 2.3% in January from the 1.9% decline in December.

Annual food prices deflation accelerated to 0.8% in January from 0.7%, but on a monthly basis food prices rose 0.6%, with fresh food up 0.3% and ambient food up 0.9%.

British Retail Consortium chief executive Helen Dickinson said that while January bucked the monthly trend of an easing in shop price deflation, this was not the whole story, as the rise in food prices indicated.

"Fluctuations in the monthly figures belie an underlying trend of building cost pressures that are gradually feeding through from the fall in sterling combined with higher commodity prices.

"This will inevitably mean that we start to see a general upward trend in inflation over 2017," she said.

The month-on-month increase in food prices was offset by the discounting of excess stock by a number of non-food retailers after a tepid sales performance over the festive period.

Looking forward she said retailers’ focus will be on protecting their customers from the effects of increasing input costs - "but with the cost of doing business rising and margins and profits being squeezed, their efforts will require the support of public policies that help them keep prices low for shoppers."

Nielsen's head of retailer and business insight, Mike Watkins, said consumer demand was better than expected at the end of last year and retailers were still managing to limit currency related cost increases being passed onto shoppers.

"This is helping to give some stability to the industry at the start of 2017. However, there is already inflationary pressure elsewhere in the economy and this will start to have an impact on the disposable income of households later in the year."