UK shop price inflation drops sharply to lowest level in almost 2 years

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UK shop price inflation eased sharply in January to its lowest rate in almost two years as retailers heavily discounted goods during a weak sales period, according to industry data.

The British Retail Consortium said on Tuesday that annual shop price inflation slowed to 2.9 per cent in January, down from 4.3 per cent in December. It is the seventh consecutive monthly decline and the lowest rate since May 2022.

The BRC shop price index, which provides an early indication of pricing pressures ahead of the publication of official data on February 14, will raise hopes that underlying inflationary pressures are continuing to ease despite the uptick in the headline measure to 4 per cent in December.

The drop in shop inflation resulted from retailers offering “heavily discounted goods in their January sales to entice consumer spend amidst weak demand”, said BRC chief executive Helen Dickinson.

Despite increasing from 3.9 per cent in November, December’s inflation rate was still well below the multi-decade high of 11.1 per cent reached in October 2022.

Markets have been pricing in that the Bank of England will hold the benchmark interest rate at its 15-year high of 5.25 per cent on Thursday, but will start cutting rates in June as inflation is expected to slow towards the BoE’s 2 per cent target.

She noted that the price of milk and tea also fell in January compared with the previous month, while increased alcohol duties kept the cost of drinks elevated.

Non-food prices fell 1.4 per cent month-on-month, driving an overall annual decline across all categories, the BRC said. Annual non-food inflation slowed to 1.3 per cent in January from 3.1 per cent the previous month, marking the lowest rate since February 2022.

Mike Watkins, head of retailer and business insight at NielsenIQ, who helped to compile the data, said: “Shoppers are seeing savings at the checkout with non-food retailers on promotion and food retailers continuing to reduce prices when the costs of goods fall.”

Annual food inflation also decelerated to 6.1 per cent in January, from 6.7 per cent in December, falling well below the peak of 15.7 per cent in April 2023, BRC data showed.

Both fresh and ambient food prices registered a decline in the annual rate of growth. The former eased from 5.4 per cent to 4.9 per cent, while the latter — which refers to items that can be stored at room temperature — fell from 8.4 per cent to 7.7 per cent.

The BRC data suggests that official food price inflation will continue to slow after dropping to 8 per cent in December, down from a 45-year high of 19.1 per cent in March. Food and energy prices surged over the past two years after Russia invaded Ukraine in early 2022, hitting the poorest households the hardest.

Despite the sharp fallback in price growth, the BRC warned about risks to the outlook, such as new cost pressures from higher business rates and the increase in the national living wage from April and from unrest in the Red Sea.

“Rising geopolitical tensions will also add to uncertainty and costs in supply chains,” said Dickinson.