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Summary: UK Retail Inflation January 2015 - Inflation falls to a 15 year low driven by falling petrol prices and cheaper food


The Consumer Price Index (CPI) fell to a 15 year low of just 0.5% in December as falling petrol and food prices pushed down the overall rate of inflation.

The full impact of falling oil prices is yet to filter through the supply chain. Our view is that the possibility of overall deflation has increased and could emerge as early as March.

The markets reacted on the news of a sharp drop in inflation with a fall in the value of Sterling while bond yields were also trimmed as the prospect of a rise in interest rates are pushed back yet further. Our forecast suggests that interest rates will rise no sooner than mid-2016.

Mark Carney, Governor of the Bank of England commented: “It’s a question of the pace of those interest rate increases, and the degree. And relative to a year ago, it is probably a little more gradual and limited?.?.?.?largely because of factors outside our shores.”

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

Food and drink

The CPI recorded deflation in food of 1.7% in December, equalling the rate in November which was the deepest rate of deflation for at least 10 years.

We expect food deflation to remain at similar levels as competition within the UK grocery sector intensifies. The latest strategy update from Tesco suggests further investment in price cuts as they focus on their core grocery business in the UK and hit back against the discounters such as Aldi and Lidl. Sainsbury’s, Morrisons and Asda have all followed suit in announcing aggressive price cuts.

Petrol is also likely to become a key battle ground for the supermarkets and the use of petrol vouchers to entice consumers into the store will become an important strategy.

On the supply side, commodity benchmarks suggest that inflationary pressure remains muted and producer prices remain deflationary. Lower costs faced by retailers will be passed on to consumers as competition heats up.

The outlook for commodity prices suggests that food prices will remain deflationary for the short to medium term.

Clothing and footwear

Clothing and Footwear deflation was 0.3% in December according to the ONS. Anecdotal commentary suggests that retailers approached the sales period with higher stock levels given the unseasonably warm Autumn period. This resulted in more aggressive and wide-spread discounts as retailers attempted to clear excess stock.

According to the BRC-Nielsen Shop Price Index, Clothing and Footwear deflation remained steady at 9.7%. As we have mentioned in previous analysis, we view that in reality deflation is likely to be in between the two measures.

Household goods

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 December deflation accelerated to 2.8% from 2.1% in November.

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 sector has seen deflation in every month this year. In December, the SPI reported deflation of 0.8%.

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

Consumer electronics

Deflation in consumer electronics remained fairly stable at 5.4% in December according to the SPI. The impact of Black Friday did not have a significant impact on deflationary figures because it was a flash-sale and it did not fall in the reporting period.

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