Continued price cuts cheer cash conscious consumers
Helen Dickinson, British Retail Consortium director general, said: “Shop prices reported deflation of 1.6% in August and marked sixteen consecutive months of falling shop prices for consumers. Clearly retailers are continuing to help drive down the overall inflation rate (Consumer Price Index).
“The summer months saw retailers provide plenty of attractive offers on fresh food goods which saw their lowest level of inflation this year, with vegetables, fish and also milk, cheese and eggs contributing to the downward pressure. Big-ticket goods that we tend to associate with the summer, gardening, electricals, DIY, furniture and floorcovering, helped to sustain low prices.
“What’s more, as the UK economy continues to pick up, the benefits of subdued cost increases – oil and commodity prices remained relatively flat over the first half of the year – incurred by retailers will be passed on to customers.
“While the Bank of England’s recent estimates suggest that retailers margins are still below pre-crisis levels, retailers will take heart from an outlook for costs that is broadly encouraging.
“Meanwhile the industry will keep building the solid foundations for growth in consumer spending”.
Mike Watkins, head of retailer and business insight, Nielsen, said: “Many non-food retailers will have looked to keep prices stable as end of season ranges sell through, and for supermarkets there was an opportunity to capitalise on the improved summer weather by keeping prices low, to tempt shoppers to spend a little more on food and drink. With the trading environment still challenging, all retailers will now be keen to keep prices as competitive as possible to encourage consumers back into store after the summer holidays“.
Overview
The BRC-Nielsen Shop Price Index (SPI) reported annual deflation of 1.6% from 1.9% in July, decelerating but remaining deeper than the twelve month average rate of 1.2%. The deceleration in the overall SPI figure has broken the four month declining trend. Food inflation has remained at a record low of 0.3% in August, while non-food deflation decelerated to 2.9% from 3.3% in July.
Food inflation remains at its lowest level since the inception of the monitor in December 2006. Fresh food inflation fell to 0.1%, the lowest level reported in the last 12 months and significantly below the 12 month average of 1.3%. The rate of inflation within the ambient food category rose to 0.6% from 0.2% in July.
The prices of the majority of the agricultural commodities that we follow closely fell over the second half of 2014, with the main exception being cattle, coffee and cocoa. The growing demand for chocolate comes as prices for cocoa, its main ingredient, are at a three-year high due to high demand around the world. Sugar prices, meanwhile, have remained subdued due to bumper crops in producing countries. Prices for corn, soybeans and wheat on the Chicago Board of Trade, the global benchmark, slid in recent weeks to the lowest levels since 2010 as U.S. crops developed in good condition and outlook improved for harvests in Russia and Ukraine. Dairy prices in the FAO’s index declined 4.4% from June, falling for a fifth month, reflecting both reduced import demand and abundant export availability. The dramatic drop in cotton prices has coincided with upgraded harvest forecasts for the US, the world’s biggest exporter of cotton bales. Uncertainty over cotton policies in China, the largest cotton producer and consumer, has also depressed prices. Oil prices fell marginally in the second quarter of the year. The global outlook for rising commodity prices remains modest.
Agricultural commodities
The Thomson Reuters/CoreCommodity CRB Index, a weighted commodities benchmark, was down 4.5% in the three months to the end of our survey period (Aug 08). Most of its downward movement was due to good weather and ample supplies in the US which pulled down the prices of the major grains and soybeans, ample supply of oil also offset geo-political price rise fears.
Thomson Reuters/CoreCommodity CRB Index
The official measure of inflation, The Consumer Prices Index (CPI) grew by 1.6% in the year to July 2014, down from 1.9% in June. Falls in clothing prices provided the largest contribution to the lower rate. Other large downward effects came from the alcohol, financial services and food product groups, reflecting lower commodity prices and intense competition in the supermarket sector. The largest, partially offsetting, upward effect came from the transport group. It is the belief of some city analysts that CPI inflation could ease to as low as 1% by the end of this year and will remain comfortably below the 2% target in 2015. This would support the recovery in real consumer spending and strengthen the case for keeping official interest rates on hold until the second half of next year.
The latest BRC-KPMG Retail Sales Monitor reported a fall in sales of 0.3% on a like-for-like basis but up 1.3% on a total basis. Furniture was the best performing category, reporting its highest growth since January, excluding Easter distortions. Meanwhile, Food was the worst performing category and experienced its deepest three-month average decline since our records began in December 2008. The weak sales figures may raise concern that the consumer recovery is losing steam. However, the underlying picture is probably not as weak as it looks. July’s figures face a tough comparable with the previous year and also because the BRC measures retail sales values, the headline growth rate continues to be pushed down by falling prices. Additionally, the weakness appears to be largely concentrated in the food sector, where intense competition between supermarkets is leading to aggressive price cutting. Indeed, the three-month average of the annual growth rate in food sales was -1.4% in July, whilst non-food sales rose by a robust 3.4%.
The cost of living has eased marginally for families in the UK as the average household had £173 a week of discretionary income in July 2014, up £3 a week year-on-year. Discretionary incomes rose year-on-year for the tenth consecutive month. Household budgets were bolstered by a sharp slowdown in essential item inflation including fuel, food and mortgage interest payments. The prospects look bright for a continued solid recovery in consumer spending. This might be surprising, given that real wages were still falling in the second quarter, however, the subdued outlook for inflation and brighter prospects for the economy should sustain consumer confidence. Also, these brighter prospects for the UK economy have helped contribute to the strengthening of sterling which has in-turn made imports cheaper. With the backdrop of stable commodity markets, strengthening of sterling and benign pressures in the supply chain, low inflation looks set to continue in the medium term bar any supply chain shocks. Price pressures at the start of the production process are also very weak. The latest Producer Price Index figures showed that the annual rate of output price inflation fell from 0.3% to -0.1% in July, the lowest rate since October 2009.
Shop price inflation annual percent change, food and non-food contribution
Food
Food inflation remains at its lowest since the series began in December 2006. Overall food inflation has averaged just 1.3% over the last twelve months and 0.4% in the last three months.
On a month-on-month basis, prices rose by 0.2%, after a 0.7% fall in July.
Fresh Food
Fresh food inflation fell in August to 0.1%, below the twelve month average of 1.3%. This is the lowest level of inflation since June 2010. Upward pressures came from the oils & fats, meat, fruit and convenience food all reporting inflation above the overall fresh food category. Downward pressure came from the fish, milk, cheese & eggs and the vegetables categories.
On a month-on-month basis prices rose by 0.1% after a 0.7% fall in July.
Ambient Food
Ambient food inflation rose to 0.6% from 0.2% in July. Downward pressure came from the non-alcoholic beverage, the sugar, jam, honey and syrup, bread and cereals categories, all reporting deflation in July. Inflation in alcoholic beverages was above the category average.
On a month-on-month basis prices rose by 0.5% from a 0.6% fall in July.
Non-Food
Non-food deflation decelerated to 2.9% from 3.3% in July. Five sub-categories experienced deflation in August. DIY, Gardening and Hardware experience accelerated deflation, while Books, Stationary and Home Entertainment entered deflationary territory. Clothing and Footwear and Electricals experienced deflation deeper than the category average while Health & Beauty and Other Non-Food were the only categories to experience inflation but at a flat and decelerated rate respectively.
On a month-on-month basis prices rose by 0.6% from a 0.8% fall in July.
Clothing & Footwear
August experienced a fall in the level of deflation in the Clothing and Footwear category reaching 10.2% from 11.2% in July. All sub-categories experienced deflation in July with children’s, women’s clothing and other clothing more deflationary than the category average. The Clothing and Footwear category has a three and twelve month average of 11.7% and 11.0% respectively. The lowest cotton price since 2009 is good news for retailers and consumers alike.
On a month-on-month basis prices rose 0.6% after a 0.1% fall in July.
Furniture & Floorcovering
In July, deflation in the Furniture and Floorcoverings category decelerated to 0.3% from 2.7% in July, above both the twelve and three month averages of 1.7% and 1.5% respectively. The house textiles entered inflationary territory, while the furniture, furnishing and carpet category experienced deflation in August. Gross mortgage lending was £19.1bn in July, up 7% on June’s figures and up 15% compared to July 2013. UK house prices rose by 0.1% in July and were 10.6% higher than July 2013. The typical UK house is now worth £188,949. Once again, the figures hide a sharp contrast between London and the rest of the UK.
Prices rose 3.3% on a month-on-month basis from a 2.4% fall in July.
Electricals
Deflation in the Electricals category decelerated to 4.7% in Aug from 5.0% in July. Household appliances reported deflation above the category average while audio and visual equipment category reported deflation below the overall category. The GfK ‘climate for major purchases’ index rose two points in August to -1, up 15 points from August 2013. Consumer credit increased by £0.4bn in June, compared to the average monthly increase of £0.7bn over the previous six months.
On a month-on-month basis, prices fell 0.1% from a 1.3% fall in July.
DIY, Gardening & Hardware
The DIY, gardening and hardware category remained in deflationary territory in July, with a 2.3% fall in prices over the year, below its three month average of 1.2%. The tools and equipment for the house and glass, tableware and household utensils both experience accelerated deflation.
On a month-on-month basis prices fell 0.5% in July after a 0.2% fall in July.
Book, Stationary & Home Entertainment
The Books, Stationery and Home Entertainment category entered deflationary territory this month, reported a 0.4% fall in prices below the twelve month average of 0.5% but above the three month average of 0.3%. Home entertainment experienced decelerated deflation while the stationery category reported accelerated deflation Books and newspapers reported a fall in its inflation rate.
On a month-on-month basis prices fell 0.3% after a 0.2% rise in July.
Health & Beauty
The Health and Beauty category reported annual inflation of 0.7% in August. Personal care contributed to the downward pressure on the overall inflation rate entering deflationary territory, while toiletries & cosmetics experienced acceleration in its inflation rate.
On a month-on-month basis, prices rose 0.2% after falling 0.6% in July.
Other Non-food
The other Non-Food category reported annual inflation of 0.4%, down from 0.7% in July.
On a month-on-month basis, price rose by 0.1% after a flat July.
Methodology The SPI is administered by Nielsen, who collate and analyse the data on behalf of the BRC.
The index provides an indicator of the direction of price changes in retail outlets. The BRC launched the Shop Price Index to give an accurate picture of the inflation rate of 500 of the most commonly bought high street products in stores.
As the Index is designed to reflect changes in shop prices, the sampling points chosen are five large urban areas, spread nationally. Not all sample stores are in city centres; they have been selected to reflect local shopping habits. Therefore, the sample includes superstores on out-of-town sites, town centre department stores, local parade stores, and shopping centres. In each location, Nielsen collect and process the data for the BRC, visit stores of differing types, e.g. grocery, confectionery, DIY, department stores – including small and large multiples and independents. Data collection is monthly and always in the same stores to maintain consistency.
The items for which prices are collected reflect standard consumer purchasing patterns in terms of branded/own label split and price distribution. The Index is constructed of seven main sectors of purchase: food, DIY, gardening and hardware, furniture, books, stationery and home entertainment, electrical, clothing and footwear, and other non-food. In total there are 500 items representing the seven main sectors, there are around 6,500-7,000 price points collected each period. Each product class category has an individual weighting based on the “All households” expenditure measured in the Family Expenditure Survey. This data is also used to weight the Office for National Statistics Retail Price Index (RPI).
Although it is a proxy measure of inflation, the Shop Price Index is more focused than the Retail Price Index, and demonstrates the extent to which retailers contribute to inflation through their pricing of a range of commonly bought goods.
