Shop prices remain firmly in deflation mode, BRC-Nielsen index shows

Shop price deflation increased to 1.8% in May from the 1.7% decline in April, according to the BRC-Nielsen shop price index.

Non-food deflation lessened to 2.7% from the 2.9% in April, while food moved back into deflationary territory in May at -0.3% as it continues to fluctuate around the zero mark.

Within food, there was an acceleration in fresh food's deflation rate, falling from 0.5% in April to 0.8%, which compares with the deepest deflation rate last year. Ambient food inflation fell back to 0.4% in May after accelerating sharply in April to 1.0%.

“The fact that today’s figures remain deflationary doesn’t come as a great surprise," Helen Dickinson, chief executive of British Retail Consortium. "We’ve experienced a record run of falling shop prices and, for the time being, there’s little to suggest that’ll end any time soon – so the good news for consumers continues."

Looking further forward she said recent commodity price increases will start to put pressure on retailers to raise their own prices before long.

"We would normally expect these input costs to filter through to prices eventually, but the big question is how far fierce competition in the industry will insulate consumers from price increases. If retailers do continue to absorb these costs it’ll be more important than ever that other external costs, business rates chief among them, are brought under control.”

Mike Watkins of Nielsen added that with shoppers indicating that they are becoming more cautious about spending, retailers will have to keep non-food prices "the same or probably even lower over the next six months.”

Analysts at Shore Capital said the data was "pretty gloomy reading for retailers and shareholders alike", with deflation remaining "firmly in the system, particularly in the non-food arena".

"The deflation in the system rests alongside wages and salaries that are rising ahead of prices, as manifested in the ONS data and the Asda Income Tracker," wrote ShoreCap's Clive Black.

"Whilst this is so, there appears to be caution amongst many consumers reflected in easing GfK NOP consumer confidence data in recent times, mirroring slowing macro-economic data in the UK and perhaps the political circus that is the EU referendum. With the latter three weeks away, maybe the circus acts will go back to their cages and life will return to something resembling a little more normality, so improving the consumer mood with uncertainty removed."

He also noted that on the bright side, summertime ahead could bring better weather, the Queen's 90th birthday celebrations, the UEFA football extravaganza in three of the four home markets and the Rio Olympics, "a festival of creative drug use and maybe some sport".