The latest inflation figures released today by the ONS show that inflation, as recorded by the Consumer Price Index (CPI), reached 1.8% for the 12 months to January. This means prices increased at a faster rate than they have done for almost 3 years...
The biggest contributing factor has been an increase in fuel prices. The fall in food prices driven by the supermarket price war seems to have reached an end. The rise in oil prices pushing up fuel costs and the fall in the value of the pound have combined to create an environment where we expect to see prices continuing to rise.
The cost of importing products has rocketed and businesses are looking to pass this on to consumers through higher prices.
The supermarket price war has helped protect shoppers from the impact over recent months, but we’re seeing the impact hitting consumers now. New supplier contracts with retailers see them passing the cost on, and the hedging that had helped reduce the impact will largely have run out.
James Brown from Simon-Kucher commented “It’s not just simple price increases, but reduced promotional discounting and of course “shrinkflation” – where prices are held but product size is reduced. We expect to see fewer or lighter promotions, and smaller or lighter products on the shelves over the coming months. The implication for shoppers is that we end up paying more for the same. However there are still some products where price has fallen – with clothing and footwear seeing more discounted January sales this year. With everything from Lego price increases taking place this month, to the big brewers announcing the price of a pint will go up, we expect significant push through of price over the coming months.”
Businesses and consumers will have to adapt to this new inflation environment as the Bank of England is predicting inflation will accelerate further to 2.8% in 2018.
Those going out for a romantic meal tonight will also see higher prices on average than last year. The service sector, including businesses such as restaurants, is facing multiple cost pressures which are gradually being passed on to consumers in the form of higher prices. These cost pressures stem from higher labour costs due to the National Living Wage, higher food prices and increased fuel costs.
War of the Roses
Despite inflation taking bite this Valentine’s Day, savvy romantics still had the opportunity to buy at bargain prices with Aldi advertising 100 red roses for £25. This February it is clear that the supermarket price war has briefly morphed into a War of the Roses.
James Brown (Consumer Goods & Retail specialist and Partner at Simon-Kucher) commented “This is just one example of headline seasonal promotions regularly used by the discounters such as Aldi. These promotions, along with their strategy of stocking a smaller range of goods at low prices appears to be paying off with Aldi overtaking the Co-op to become the UK’s fifth largest grocer in terms of market share. We expect to see Aldi’s share continue to grow – but for their prices to also move up slightly given cost pressures. However, the going presence of the hard discounters (Aldi and Lidl) continues to limit the room the mainstream retailers have for price increase, and will have a dampening effect on grocery inflation. Aldi for one will definitely be hoping that their Valentine’s Day promotion has them smelling of roses.
Elsewhere, whether out for a romantic meal or a pint in the pub, we can expect to be having to handover more than we did last year.”