UK shop prices fall as food prices show record deflation, BRC-Nielsen

Overall shop price deflation worsened to 2.0% in August from the 1.6% decline in July.

Non-food deflation accelerated to 2.5% in August from 2.2% in July, while further cuts in the fierce supermarket price war saw food deflation speed to to a record low, falling 1.1% in August from 0.8% in the previous two months.

“Shop prices continued their record run in deflationary territory. Lower prices this August compared to last were driven by a combination of continuing promotional activity, softening oil prices and a global supply glut of wheat weighing on food prices," said Helen Dickinson, chief executive of the British Retail Consortium.

She pointed out that the devaluation of sterling in wake of the referendum is sure to put upward pressure on shop prices later in the year as retailers should not see cost increases until existing contracts with foreign suppliers come to an end.

"Even then, retailers will have to make a decision about when and how much to pass onto consumers. Given the strength of competition in the market, and if the economy softens in line with predictions, any pass through may be more limited than implied by the exchange rate movement.

"As far as they can, retailers will endeavour to mitigate impacts by looking for productivity gains in their own businesses, rather than compromising on the value they are offering to consumers.”

Nielsen's Mile Watkins added that "competition for discretionary spend is likely to intensify as we head towards the end of the year, so retailers will be keen to keep prices low and promotions sharp".

Analyst Clive Black at Shore Capital expected to see deflation to ease and for the possibility of modest or very low level inflation next year if sterling remains at current levels versus the dollar and the euro.

Even though the grocery industry is very competitive as larger supermarkets battle the rising limited-assortment discounters like Aldi and Lidl, "in a low margin industry it is hard to see substantial price increases of imported goods not being reflected in some pricing action, albeit we do believe that the retailers will seek to protect the consumer as much as possible".

For the general retailers the inflation conundrum could be more of a challenge, Black added.

"The link between the macro-economy, so interest rates, government expenditure, inflation, employment and household income, and the retailer's performance is much more significant perhaps than is the case for the grocers. As such, more stock specific factors underpin investment cases in our view; we prefer low ticket and effective discount, pure play online particularly with an international bent and self-help stories. "