Inflation falls to zero on high street

Inflation of non-food goods has dropped to zero, according to new figures from the British Retail Consortium (BRC) – but experts have warned that consumers are still unlikely to be in a position to spend enough to give the economy a boost.

Overall shop price inflation fell to 1.4 per cent in January from 1.7 per cent in December – the lowest in almost two years.

Food inflation dropped to 3.7 per cent in January from 4.2 per cent the previous month and to its lowest level since July 2010, bringing welcome relief for shoppers who have seen a significant rise in the cost of their weekly shop in the past months.

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Within that, clothing, furniture and electrical goods were cheaper than 12 months ago, with the price of electricals falling at its fastest rate for three years.

“Shoppers are indicating that they still need to economise on spending in 2012,” said Mike Watkins, senior manager of retailer services at Nielsen, which co-authored the report with the BRC. “With retail sales after Christmas off to a slow start, food retailers in particular continued to offer savings in January with price cuts and promotions on everyday items being used across the industry.

“These initiatives, as well as the underlying slowing of inflation and the annualisation of the VAT increase, are bringing shop prices down and closer to the historical levels we have seen over the last few years.”

VAT is at 20 per cent, raised by the government last January in a bid to boost tax revenues to cut the budget deficit.

“With the impact of the 2011 VAT rise finally gone from annual comparisons, these figures show how retailers are holding down prices for customers despite a range of upward pressures,” said Stephen Robertson, BRC director general.

“Food price inflation continues to come down and is now the lowest it’s been since July 2010, thanks to discounting and cheaper commodity costs working through.”

He added: “Further falls in the official rate of inflation, which are expected during the coming months, should be a boost to customers’ budgets and, crucially, should help to improve consumer confidence. For there to be any significant improvement in retailers’ fortunes in the coming year it’s essential that people feel better about their personal finances and become more willing to spend.”

The price of electrical goods fell at its fastest rate for three years, plummeting by 4.9 per cent. The cost of clothing and footwear fell in January by four per cent, while furniture and floor coverings dropped marginally – by 0.3 per cent.

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Only the inflation rate in the health and beauty category rose compared to December, while DIY, gardening and hardware and miscellaneous goods saw a slowing in their inflation rates.

Howard Archer, chief UK economist at IHS Global Insight, warned that consumer confidence would continue to wane over the coming year.

“Even allowing for the fact that the year-on-year growth rates in retail sales values in January 2012 suffered from sales in January 2011 being lifted by people making up for restricted access to the shops in December 2010 due to severe weather, this is a soft performance which suggests that the economy cannot expect much help from the consumer as it tries to return to growth in the first quarter of 2012,” he said.

“It is hard to be optimistic over the prospects for consumer spending in the early months of 2012 at least,” he added.