Soaring food prices show biggest monthly increase in two years

The average family spent an additional 6 on their supermarket shopping in January after a hike of 2.8 per cent in prices of food and other items.

Figures from the weekly price index of the trade publication the Grocer revealed that food prices in the big four supermarkets – Tesco, Asda, Sainsbury's and Morrison's – rose sharply as a result of VAT returning to 17.5 per cent and the end of Christmas promotions.

It suggested that supermarkets are applying January's VAT rises to food even though most of it is exempt from the tax.

The average price of alcohol, which is subject to VAT, rose the most, with it costing around 7.5 per cent more than in December.

The magazine report said: "So much for falling food prices. This month's Grocer price index figures put paid to any hopes that falling inflation would not be stalled by January's VAT hike.

"In theory the VAT shift should have had virtually no effect – most food is exempt from the 17.5 per cent tax – but as an investigation by the Grocer showed earlier in the month, retailers used the increase to pass on some price rises even on non-VATable items."

The figures also suggest an end to near-zero inflation of late 2009 as year-on-year food inflation also jumped sharply in January. It was up from 1.6 per cent – the lowest value in two years – to 2.6 per cent. The report suggested that rise is an indication that the UK's official inflation figures, due to be published in mid-February, are over target.

A spokesperson for Consumer Focus Scotland said: "Any increases in food prices and other essentials at this difficult economic time will clearly be of concern to Scottish consumers.

"They will want to be reassured that supermarkets are not indirectly passing on the VAT rise to the cost of food."

Other new figures published in the magazine suggest that the public are turning to vegetarian food in a bid to beat the price of meat in supermarkets. Although the number of vegetarian consumers has remained static over the past year, sales of meat-free foods have increased 5.8 per cent to 243m and 2.8 per cent by volume.

Meanwhile, Britain's second biggest supermarket, Asda, is set to provide a solution to rising prices by offering cheap deals on its own new auction website, A-Bay.

Asda's executive development director Doug Gurr is heading up plans to launch A-Bay to offer excess general non-food merchandise after seasonal and range changes to the discounter trade.

It will include items such as clothing, electricals and homeware. Asda believes the scheme will free up space to store more current stock and deliver cost savings.

It currently sends residual stock back to manufacturers or offers it to shoppers at a discounted price. However, it will be able to generate more profits by selling it on directly through the website.

The plan apparently came from the winners of Asda's third Dragons' Den-style in-house competition, which invited staff to pitch suggestions on how to run the retailer better.

The A-bay idea is said to have wowed judges who included chief executive Andy Bond, chief financial officer Judith McKenna and TV "dragon" Peter Jones.

Shore Capital analyst Clive Black described the A-Bay tag as "highly innovative".

In November, Tesco launched a similar service to A-Bay, offering consumers refurbished electrical lines such as Sony, Phillips and Samsung, at bargain prices on e-Bay.

The UK's first online residual stock marketplace for the industry, Emarket, also launched last year.

IN NUMBERS

How much extra the typical family paid for food in January

2.8%

Rise in the cost of the average shopping basket from December

2.6%

Year-on-year food inflation rise in January

1.6%

Year-on-year food inflation rise in December

7.5%

Rise in the cost of alcoholic drinks (not exempt from VAT)

2.4%

Drop in the price of fruit and vegetables in January