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News - 6 November 2009

Will falling prices attract shoppers?

With the price of non-food merchandise falling Christmas could see consumers returning to the high streets. But will this be enough to counter the problems of unemployment and fear of the unknown that are currently denting consumer confidence. Industry experts are somewhat guarded in their predictions.

Stephen Robertson, British Retail Consortium Director General, said, “This is a great time to be a customer.

Overall shop prices are no more than they were a year ago. Food inflation has tumbled by three-quarters since its peak last August and is expected to remain low for the rest of the year.

“The price of non-food goods has been deflationary for eleven months in a row – with the biggest falls in clothing, footwear and electricals.

“Christmas is lining up to be a punch-up between retailers as they battle it out for market share. Customers can reap the benefits from all the promotions and discounts.”

Mike Watkins, Senior Manager, Retailer Services, Nielsen comments, “The latest data seems to shows that shop prices have now stabilised which will help shoppers as they plan their budgets in the run up to Christmas.

“Fresh food inflation now seems to have bottomed out while ambient foods have slowed again to 4.3%. However, we don’t anticipate seeing price deflation in the grocery market like we have seen in the non-food channel. Non-food has remained deflationary for 11 successive months which has largely been the result of the VAT reduction and consistently weak demand.”

The BRC-Nielsen Shop Price Index reported a zero rate of inflation in October, largely unchanged from last month’s 0.1% rate of deflation. Food inflation remained at 2.5% for the second consecutive month, while the non-food category reported a slight fall in deflation from 1.4% to 1.3%.

There are a number of opposing forces on shop price inflation. On the downside, underlying economic conditions remain weak. Although a return to economic growth is imminent, the effects of the financial crisis will be drawn-out and it is likely that economic activity will remain below its full potential for some time to come. Retailers will continue to use price cuts to stimulate sales, creating downward pressure on inflation.

Consumer confidence has improved significantly during the last six months, however, households continue to restructure their balance sheets, paying down debt and increasing savings. According to the Office for National Statistics, the household savings ratio has risen for the fifth successive quarter and is at its highest level for almost six years. This recession, more so than those of the early 1990s and 1980s, has shaken many households’ perception of their future. Consumer confidence is a vital component to spending, and since one third of consumer spending goes through retailers, confidence about job security, personal finances and the economy are critical. With unemployment likely to continue rising for some time yet, and arguably a fundamental change in consumer habits, weakness in demand is likely to create an environment of low levels of inflation for some time to come.

On the upside, the reversal of the VAT cut on 1st January 2010 will have a significant impact on prices. Comparisons will not only be made against a lower rate of VAT (effectively a 2.1% change in the price of most non-food goods), but also against unprecedented levels of discounting during last year’s challenging Christmas period.

Rising cost pressures brought about from the weakness in sterling will also continue to put upward pressure on shop prices. Although sterling has stabilised since the sharp falls of 10-12 months ago, news that the UK economy remained in recession in the third quarter of 2009 and the increasing likeliness that the Bank of England will expand their asset purchase programme further has weighed heavily on sterling. In the last three months alone, the value of sterling has depreciated 5% against the euro and remains 12% down on an annual basis.

There are a number of commodities exerting upward pressure on costs, particularly oil. The price of oil has more than doubled since December 2008 to around $80 per barrel and is 16% higher on an annual basis. We expect this to feed through to prices in the medium term. Pressure from other commodities such as tea, cocoa (+61% year-on-year) and sugar (+83% year-on-year), which have reached significant highs in recent months due to shortages in supply, the result of poor harvests, will also affect some food lines.

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