Consumer spending lift as prices retreat

Britain's economy has been driven by stronger spending by consumers and businesses. Picture: Robert Perry
Britain's economy has been driven by stronger spending by consumers and businesses. Picture: Robert Perry
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Consumers have seen their spending power increase further after the biggest fall in shop prices for six-and-a-half years.

Figures published today show that the overall cost of goods on the high street fell for the third consecutive month in July, with retail leaders hailing the latest drop as “great news for hard-pressed families”.

The deflation was driven by declines in non-food areas such as clothing and footwear as stores continued to slash prices. Food prices were still up, year on year, though the rate of inflation eased.

Today’s report by the British Retail Consortium (BRC) and market research consultancy Nielsen follows last week’s official data showing Britain’s economy gathering pace in the second quarter of the year, driven by stronger spending by consumers and businesses.

However, senior industry figures have expressed caution, warning of little real change to the challenging consumer backdrop this year. Lord Wolfson, the Next chief executive, said yesterday that “real growth” was needed in the economy before wages could rise without fear of stoking inflation.

The latest BRC-Nielsen shop price index shows the annual deflation rate standing at 0.5 per cent in July, compared with 0.2 per cent a month earlier.

BRC director-general Helen Dickinson said: “Shop prices have now fallen for three consecutive months compared with last year and July’s rate showed the biggest drop for six-and-a-half years.

“This is great news for hard-pressed families whose budgets have been squeezed by rising utility bills, transport and other costs. It shows just how hard retailers are working to serve their customers and underlines how deep the promotions and discounts from retailers are at the moment.”

She said food inflation, which fell from 2.7 to 2.2 per cent in July, was now at its lowest rate for three years.

Mike Watkins, head of retailer and business insight at Nielsen, said: “Whilst the 2013 heatwave is bringing strong sales uplifts for food retailers, it’s holding back some non-food sales growth, so the welcome slowdown in shop price inflation in July should benefit most retailers and help to kick-start consumer demand as we enter the peak holiday period.”

Recent figures from the John Lewis Partnership have laid bare the impact of the heatwave, presenting starkly contrasting fortunes for its two operations.

While the protracted hot spell kept shoppers out of its department stores, sales at its Waitrose supermarket business soared as sun-seekers stocked up on food, drink and barbecue products for eating outdoors.

The BRC data will come as a relief to Bank of England policymakers as they attempt to keep a lid on inflation.

Although the consumer prices index rose to 2.9 per cent in June from 2.7 per cent the month before, it is expected to fall back by the end of the year as commodity prices ease.

Inflation was prevented from climbing higher by falls in the prices of fruit, vegetables, bread, air fares and package holidays. The BRC report noted: “Barring any shocks to the supply chain, we expect shop prices to remain fairly stable in the medium term.”

Researchers said promotional activity was at “elevated levels” across both food and non-food sectors. They observed that the recent hot weather had given retailers “an opportunity to step up the level of discounting of seasonal items”.

The survey, which was conducted during the first week of July, found that non-food prices were now at their lowest rate since December 2010.