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Summary: UK Retail Inflation December 2014

The Consumer Price Index (CPI) fell to a 12 year low of just 1.0% in November as food deflation and the impact of lower oil prices drove down the overall rate. As we pointed out in November’s report, we feel that the CPI still has some way to fall given the weakness in oil prices and increased competition in the grocery sector.

We believe that there is a real possibility of CPI deflation in the coming months as the 40% fall in oil prices since June filters through to consumers.

Lower than expected levels of inflation will to hold back any tightening of monetary policy. Expectations of an interest rate rise have been pushed back further – our adjusted forecasts now suggest an interest rate rise will not occur until 2016.

Lower levels of inflation and the continued recovery in the labour market and wages implies strong wage growth heading into 2015.

CPI recorded deflation in food of 1.7% in November, the deepest rate of deflation for at least 10 years.

Food sector
Competition in the food sector continues to intensify suggesting there are no signs of downward pressure on food inflation abating any time soon. Tesco appears to be renegotiating contracts with 3,000 of its suppliers with a view of implementing more price cuts in 2015. New fee arrangements will apparently make charging simpler, in exchange for more competitive prices, which will then be passed on to consumers pushing prices down further.

In turn, this is likely to push other supermarket s to follow suit – this is a “real” price war.
Supply side, commodities continue to favour low inflation in the short to medium term. Oil has fallen to a 5 year low and price pressure of other core commodities remains benign.

BRC-Nielsen Shop Price Index showed food deflation fell to 0.2% - a record low in this series.

Clothing and Footwear
Clothing and Footwear deflation accelerated again according to the BRC-Nielsen Shop Price Index. In November, deflation was recorded at 9.7%. This also chimes with anecdotal commentary that the unseasonably warm weather has led to deep and widespread promotions.

Furniture and Flooring
Despite a slowdown in the housing market, the sale of home related goods continues to impress. According to the BRC-Nielsen Shop Price Index, Furniture and Flooring has been deflationary for over one year, in November deflation slowed to 2.1% from 2.8% in October.

December is typically a slow month for household goods with January promotions expected to push deflation lower in the New Year.

DIY and Gardening
DIY and Gardening has seen eleven consecutive months of deflation according to the SPI and in November was 1.1%, a slowdown from a fall of 2.7% in October.

Lower costs through shipping, the effect of an increase in sterling and low commodity pressures, especially oil, are helping retailers rebuild margins.

The favourable impact of exchange rate movements, lower shipping costs, in part because of oil, and online competition has meant consumer electronics continue to become cheaper. The impact of Black Friday will not show up in any official inflationary statistics because of the timing of the year.

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