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Shop price inflation jumps in June
Jul '11
British Retail Consortium releases Nielsen Shop Price Index for June 2011.

Stephen Robertson, British Retail Consortium Director General, said:

“Household budgets are under pressure. Real disposable incomes have dropped the most in 34 years but increasing petrol and energy bills plus low wage rises are the main causes.

“Shop prices are going up much more slowly than the wider Consumer Prices Index. Overall shop price inflation is being driven by surging world commodity prices, the effect of the weak pound on import costs and higher VAT – all beyond retailers' control.

“Headline food inflation is up, but 39 per cent of grocery spending is going on promoted goods, showing there are lots of offers available and savvy shoppers are taking advantage to minimise the impact on real-life bills.

“Considering January's VAT rise, non-food inflation is still very low.

“The latest bout of retail administrations shows how weak consumer spending is. Retailers are using discounts to generate sales at the expense of margins. Sales have started earlier this year, especially in clothing and footwear, where prices are actually cheaper than a year ago.”

Non-food inflation averaged just 1.3% in the first half of 2011, primarily driven by the higher rate of VAT. David Miles – external member of the Monetary Policy Committee (MPC) – argued that the increase in VAT, energy and import prices, accounts for more than 100% of the 2.5 percentage point overshoot in the Consumer Price Index (CPI) target.

Retailers are competing for a share of households' shrinking real incomes, down for the first time in three decades in 2010, by using promotions and discounting. This is evident in clothing and footwear and in electrical goods, where the rate at which prices are falling has risen sharply since the beginning of the year to 2.5% and 3.3% respectively.

Clothing & Footwear

Annual deflation in the clothing and footwear category accelerated to 2.5% from 2.0% in May, the fastest deflation rate since August 2010. Upward pressure was exerted by the clothing accessories and baby-wear categories, both of which reported a sharp rise in inflation. This was offset by accelerating deflation in the men's and women's clothing and footwear categories.

Pressure from input costs are slowing some signs of easing with a 25% fall in the price of cotton over the last four months, although annual comparisons still remain high. The acceleration in deflation in June is largely due to summer promotions beginning earlier this year compared with last as retailers struggle to stimulate consumer demand. This was highlighted in a recent report by PwC which showed 70% of shops had promotional displays in their windows compared with 60% in 2010.

On a month-on-month basis, prices increased marginally by 0.1% in June after three consecutive months of decline.

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