UK shop price inflation accelerates as Brexit uncertainty intensifies

07 Jan 2019 --- New BRC-Nielsen Shop Price Index figures report that UK Shop Price inflation accelerated in December to 0.3 percent, up from 0.1 percent in November. This is the fourth month of inflation in five years and the highest inflation rate since April 2013, the report for December 2018 states.

“December’s Shop Price figures only serve to underline how tough conditions are in the retail industry. Despite non-food goods being cheaper on average than last year, early indications suggest that retailers faced a challenging environment throughout the festive season,” Helen Dickinson OBE, Chief Executive of the British Retail Consortium (BRC), which jointly conducted the report says.

“Shoppers may have become accustomed to great value, but Brexit uncertainty means that a continuation of the low prices is by no means guaranteed. Without a trade deal with the EU, the cost of importing many of the goods we buy day to day will go up significantly and retailers simply do not have the room in their margins to protect consumers from those costs. Unless Parliament comes together behind a deal that ensures frictionless, tariff-free trade we could see prices paid by UK households rise substantially,” she adds.

The news comes as the UK Parliament begins a week of discussion on the Brexit deal formed between the UK and European Union, prior to a vote that is likely to take place on January 14 or 15. The general consensus is that Prime Minister Theresa May will not get enough support to push this deal through, however. A rejection, which would follow a December delay on the vote, would only heap further pressure on a beleaguered May as March 29 (the date for the UK’s exit from the EU) draws ever closer. It would fuel further calls for a second referendum on Brexit (a so-called “people’s vote”), although it is unlikely that such a vote could take place in such a short time frame, meaning that a delay of the Article 50 process would be required.

On the issue of Brexit, the BRC is calling for “an arrangement which ensures frictionless and tariff-free trade after March 29.” The trade body’s membership comprises over 5,000 businesses delivering GB£180bn of retail sales and employing over one and half million employees.

According to the BRC-Nielsen report, non-food deflation decelerated in December to 0.4 percent from 0.8 percent in November. This is the lowest rate of deflation since March 2013. Food inflation decelerated to 1.5 percent in December from 1.6 percent in November. Fresh food inflation slowed to 0.9 percent in December, down from 1.2 percent in November. Ambient food inflation accelerated to 2.3 percent in December from 2.1 percent in November.

The easing of fresh food inflation is likely to be the first indication of the downward pressures for the category from lower international food prices, the BRC reports. Global food prices have started declining (except for Cereals) in May 2018. As it takes about 7-10 months for those changes to filter through into final consumer prices, we expect food price increases to subside, notwithstanding political turmoil in the UK.

“Food inflation eased overall, and we expect this to continue, given the fall in global food prices earlier this year which will take 7-10 months to fully feed through into shop prices,” Rachel Lund, Head of Insights and Analytics at the BRC, reiterates to FoodIngredientsFirst.

Non-food prices stabilized over 2018, leading to a slowing of the rate of deflation of non-food prices. This has been the result of both delayed impacts on non-food shop prices of the post-referendum exchange rate adjustment and a change in the promotional strategies deployed by retailers.

“With an uncertain economic outlook, retailers had to work hard to encourage customers to keep shopping, and in the run up to Christmas price discounting was deeper and began earlier across both food and non-food channels,” Mike Watkins, Head of Retailer and Business Insight at Nielsen says. “There was also unprecedented levels of vouchering in December across many supermarkets to encourage shoppers to spend, and this competitive retail environment kept increases in shop prices low. Retailers know that customers are worried about their personal finances, so they will continue to do all they can to limit price rises over the next few months despite the external pressures,” he adds.

Back in November 2018, we reported how food ingredients buyers are unlikely to find many good deals, as a spate of inflation pushes up prices on key items like raw materials, wages, transportation and logistics. Several other factors are at play. Brexit is looming, the US is involved in several trade spats around the globe and a European drought caused a decreased output in agricultural commodities and sparked further concerns that climate change will impact the food production far more regularly. All these factors are prompting concerns from many quarters that food price spikes are on the horizon.

Speaking to FoodIngredientsFirst last month, Food & Drink Exporters Association (FDEA) Director, John Whitehead, urged Parliament to focus on the future of the UK’s economic well-being. “We must ensure that we have continued free access to our main markets in Europe and no new barriers to restrict the industry from maintaining its growth in sales outside the EU,” he says. “A ‘no deal’ could create huge problems in the short term, with delays at customs interrupting just-in-time supply lines and potential additional animal health inspections and new labeling requirements adding to costs and delays,” Whitehead notes.

The UK inflation trend comes despite overall global food prices dropping. For the last figures available (for November 2018) globally traded food commodity prices declined, led by marked drops for palm oil and other vegetable oils, the Food and Agriculture of the United Nations (FAO) reported in early December. The FAO Food Price Index averaged 160.8 points for the month of November, down 1.3 percent from October and 8.5 percent from a year earlier. The index, an indicator of the monthly change in international prices of a basket of food commodities, is now at its lowest level since May 2016.

The FAO Vegetable Oil Price Index hit a 12-year low, declining 5.7 percent from October. Large palm oil inventories and abundant supplies of soy and sunflower oils fueled the decline. The FAO Cereal Price Index, covering wheat, coarse grains and rice, dropped 1.1 percent during the month, reflecting large export supplies of wheat, intensified export competition for maize and new crop arrivals of rice. The latest report (for December 2018) is expected on January 10.

By Robin Wyers