Far from marking the much anticipated upsurge in shop prices, the CPI figures released today show little sign of the post-referendum fall in the pound feeding through onto the shop floor. Rather, the upward movement reflects a modest pick-up, consistent with expectations before the UK voted to leave the EU.
As expected, consumer price index figures for November released today showed a pick-up in (y-o-y) inflation to 1.2 per cent, from 0.9 per cent in October. The biggest contributors to inflation were Transport and Restaurants & Hotels, which together accounted for 0.7ppts of the 1.2 per cent overall rate. In contrast, the cost of the weekly food shop was lower than last year, which pulled the headline inflation figure down.
The service elements of the CPI, such as Education, Restaurants & Hotels and Communication, continue to experience the highest inflation rates; a consequence of our shifting demand patterns and increasing ability to pay for services and experiences. However, retail components, Clothing & Footwear and Furniture & Homewares, saw some of the biggest upward movements in the inflation rate compared to October; with clothing flipping from -0.7 per cent last month to 0.9 per cent this month.
These movements should be interpreted with care as inflation in both of these categories is highly volatile. Changes in seasons affect the ranges on offer and the pricing approach of retailers. Attempting to capture the changes in prices of what consumers are actually buying is highly challenging, as many of the ranges on offer this year didn’t exist last year to make the full comparison.
Our Shop Price Index for November, which does not attempt to capture shifting consumer behaviour by season and employs rigid specifications for items counted in the index, showed both furniture and clothing firmly in deflationary territory.
But this doesn’t mean we won’t see the prices paid in shops go up. The simple maths of the size of the devaluation means is it inevitable (the value of sterling is 10% lower than 23rd June). The Producer Price Index shows prices of imported inputs up by 14.6 per cent on last year. With already highly squeezed margins retailers simply can’t absorb it all.
To date, retailers have by and large been selling stock bought before the referendum and many are still protected by hedging contracts. As these contracts come to an end next year we will see shop prices rise. However, consumers shouldn’t be too worried. Competition in retail has kept prices falling for over 3 years and that competition has not eased. Retailers will be extremely careful about passing on rising costs to shoppers.
Rachel Lund - Head of Insight & Analytics