Extensive discounting by retailers helped offset a gloomy year

Extensive discounting by retailers helped offset a gloomy year

UK shop prices grew at their slowest pace in 16 months during December as retailers discounted clothes, footwear and electrical goods, according to research from the British Retail Consortium (BRC).

The BRC-Nielsen Shop Price Inflation Index, released today (11 January), found that non-food inflation fell to 0.3% in December, from 0.8% in November.

"Even before the impact of last January's VAT rise comes out of the year-on-year comparisons, shop price inflation has reached a 16 month low of 1.7%," said BRC director General Stephen Robertson. "This is being driven by price cuts in electricals, clothing and footwear where many items are now cheaper than they were at this time last year. Non-food inflation of 0.3% is a two-year low."

While the moves are good for consumers, many of the reductions will come at a cost to margins, said Conlumino analyst Neil Saunders.

"While lower inflation is clearly beneficial for consumers, much of the reduction has come about because of extensive discounting by retailers rather than through genuine falls in input costs.

"Ultimately, this will result in a softening of retail margins and a reduction in retailers' profits. On that basis, such extensive levels of discounting are not sustainable over the longer term and inflation could well creep back up again," he said.

Likewise, Jon Copestake, retail industry analyst at the Economist Intelligence Unit (EIU), said: “The BRC figures show that discounting over the festive period helped to offset an otherwise gloomy year. Unfortunately it is unlikely that this signals a turnaround, with more of the same expected throughout the coming year.

"The EIU is forecasting a slight volume decline in UK retail sales for 2012. Weak consumer confidence' slow wage growth and unemployment will all take their toll on the high street and the domestic sales of big retailers.

"Although online sales will continue to be a highlight in the overall picture, they will inevitably come at the expense of bricks and mortar retail channels.”