Price war intensifies as Asda cuts cost of one in 5 items

The UK's second biggest chain, owned by US Wal-Mart, the world's biggest retailer, is slashing the prices of one in five products.

Potatoes, carrots, milk, rice and nappies are among items that will see lower prices as part of its largest cuts for more than a decade.

The move has been seen as a way to offset the New Year increase in VAT on non-food items. Asda said the offers will last for at least six to 12 weeks.

Darren Blackhurst, Asda's chief merchandising officer, claimed that the company was lowering prices on a more permanent basis than its rivals.

However, an Asda spokesman declined to comment on how much the initiative would cost the company or if there would be price rises on other products outside those pencilled in for cuts.

On Hogmanay, Tesco, Britain's largest supermarket, launched 12,000 special discount offers that it said would save customers 280 million.

While a price war could ensue, UK supermarkets in the past few years have run similar campaigns that were funded through cost-cutting exercises that did not dent profit margins.

Both supermarkets are keen to protect customers from being hit by the restoration of the VAT rate from 15 per cent to 17.5 per cent.

The supermarket battle emerged as the British Retail Consortium today reports a rise in shop price inflation for December.

Food prices were up to 3.7 per cent compared to 2.8 per cent in November, with non-food price inflation increasing to 1.4 per cent up from -1.2 per cent.

Stephen Robertson, director general of the BRC, said retailers told them weak costumer demand was their biggest concern for 2010. "They are doing all they can to hold prices down and avoid passing higher costs on to customers, but shop price inflation is bound to be higher in January because of the higher VAT rate," he said.

The 5 per cent fall in the pound in the last six months has now helped cause an upward inflationary pressure on the price of food imports, said Robertson.

"VAT isn't the only issue, though.

"Increases in the costs of oil, food commodities such as wheat and sugar, and the continued weakness of the pound are also filtering through."

Supermarket sales growth has been on the ebb over recent months because food price inflation was declining.

Tesco last month reported a 2.8 per cent rise in sales for the 13 weeks up to 28 November, against 3.1 per cent the previous quarter.

Likewise, analysts are predicting that Sainsbury's, the UK's third biggest grocer, will show a rise in underlying sales of 3.8 per cent for the 13 weeks to 2 January against 5.4 per cent in the previous quarter when it publishes its trading update tomorrow.

Asda, however, did not disclose its Christmas sales figures, but claimed that its performance over the festive period had been "solid".