UK Sees Food Deflation Reach New Levels

05 Feb 2015 --- Food deflation in the UK has increased for the second time in three months, according to the Shop Price Index for January, published by the British Retail Constortium and Nielsen.

Food reported annual deflation of 0.5% in January after reporting inflation of 0.1% in December.

BRC Director General, Helen Dickinson, said: "For twenty-one consecutive months prices in Britain's shops have fallen, this month by -1.3 per cent. It's the second time in three months that we've seen food prices fall, accelerating to their lowest levels on record".

The news could pre-empt further price reductions in the supermarket wars, with retailers struggling to keep their customers.

However, deflation doesn’t always mean bad news, says Dickinson, "With the outlook for inflation low, the jobs market robust and rising real incomes gathering pace, the outlook for consumer spending looks positive. Deflation doesn't always translate into bad news for retailers. The Producers Price Index (which tracks the cost of raw materials to producers) remains deflationary, so retail businesses will continue to see decreases in their own input costs for the foreseeable future. To remain competitive, retailers will continue passing these savings on to the consumer.

"2015 is shaping up to be win-win year for shoppers and retailers alike."

Mike Watkins, Head of Retailer and Business Insight, Nielsen, said: "Over the last six months we have seen food inflation falling and as we start 2015, we now have food deflation. Whilst falling prices are of course welcomed by shoppers, the impact is that there is only marginal value sales growth across the industry. With further price cutting expected by the major Supermarkets the near term outlook is for the continuation of a low growth trading environment. Deflation also continues in clothing and electrical with non-food retailers still able to pass on the benefit of falling supply chain costs to the consumer." 

Food inflation is one of the most volatile components of overall inflation. In the Eurozone, food inflation/deflation has teetered around the 0% mark for several months, while across all sectors the Eurozone fell into deflation for the first time in five years in January. Economists are predicting a period of deflation in Europe.