Food prices have fallen for the first time in two years – but pressure on households is far from over

The British Retail Consortium’s measure of food price inflation has provided some long overdue good news, writes James Moore. But tight finances will afflict the UK economy for some time yet

Food prices have decreased on the previous month for first time in two years (PA) (PA Wire)

The light at the end of the UK’s long, dark inflationary tunnel is shining a little brighter courtesy of the British Retail Consortium (BRC). Pinch yourself, you’re not dreaming. The trade body has reported the first monthly fall in food prices in two years.

The highlight of its regular update on shop price inflation was the price of food fallin g by 0.1 per cent between August and September.

A word of caution. Food prices are highly volatile and the month on month figures in particular. The BRC’s more important year on year measure of inflation is still uncomfortably high. Its basket in September was 9.9 per cent more expensive thant it was in September 2022. But the trend there is at least moving in the right direction. The annual rate in August, for example, stood at 11.5 per cent.

What does this mean for the “official” rate of inflation, which food prices have been playing an important role in driving higher? There are actually three big measures of the changes in food prices; the BRC’s, the one produced by Kantar as part of its monthly look at how grocers are performing and the “official” rate published by the Office for National Statistics (ONS), which feeds into the Consumer Prices Index (CPI), the UK’s official rate of inflation.

The BRC’s food price inflation rate has been undershooting the ONS’s for some time, but it still tracks it fairly closely. So this is unequivocally good news, as is the fact that the BRC’s measure of annual shop price inflation decelerated further to 6.2 per cent in September. That compares with 6.9 per cent in August and the 3-month average rate of 6.8 per cent. Shop prices haven’t been rising this slowly since September 2022. Borrowers can take heart. The Bank of England’s rate setting Monetary Policy Committee will take note.

“Fierce competition between retailers,” was the explanation given by BRC’s chief executive Helen Dickinson for the improving picture on food prices.

Politicians have recently been taking shots at grocers, especially the big grocers, over high food prices. While it’s hard to see giant retailers such as Tesco and Sainsbury’s as victims, there has been an element of scapegoating at work here. Big food retailers present a tempting target for politicians looking to divert attention from their own economic failures.

But this may have worked in the consumer’s favour by encouraging grocers to step up their games on prices (Dickinson, of course, has a vested interest in countering the political narrative).

Something the data may also miss: analysts have noted a high level of discounting by supermarkets with loyalty card programmes such as Tesco’s Clubcard scheme or the Nectar Card that Sainsbury’s uses. This makes sense. These supermarkets want to encourage shoppers to use their cards, which provide them with a smorgasbord of invaluable data. But they tend not to play a role in the various inflation indices, serving as a means for consumers to reduce their personal rates of inflation.

Even with prices easing somewhat, we should remember that there continues to be pressure on household budgets. Mike Watkins, head of retailer and business insight at NielsenIQ, which compiles the data for the BRC, noted that “over half” are still feeling that they are “significantly impacted” by the continued increases in the cost of living.

This was writ large in the results of BooHoo, a fast fashion retailer, which reported a 19 per cent fall in UK revenues despite discounting prices in a bid to tempt its key demographic (teens to twenty-somethings). It also reported that pre-tax losses for the six months to the end of August widened to £26.4m compared to £15.2m.

High food prices have squeezed the discretionary spend a retailer like BooHoo, which saw its shares tumbling despite promising cost cuts, relies upon.

Greggs, the baker, on the other hand, said that its sales rose by nearly a fifth. The company put this down to people seeking cheaper breakfasts and lunches on the go. It has long marketed itself on value. Another encouraging sign: Greggs reported cost pressures easing across the business.

Watkins said: “It will be important for retail sales to keep momentum which means we can expect more price cuts and increased promotional activity across all retail channels.”

Dickinson however sounded a note of warning. There are still risks out there that could force food prices up again including high interest rates, climbing oil prices, global shortages of sugar, and the supply chain disruption caused by the war in Ukraine.

It may well be that the worst is over. But the level of uncertainty - there’s that word again - remains high and the scarring caused by the inflationary spike the UK has experienced will have an impact on the economy for years to come.