Inflation is back (already) - and it's in ambient grocery

Prices are heading upwards again in grocery’s largest category - ambient goods - as the two-year deflationary headwinds blighting the supermarkets ­dramatically eased last month.

The dry grocery category in the Grocer Price Index (GPI), saw prices edge up 0.2% year on year in the month to 1 October after 17 consecutive months of falling prices.

Dry grocery is the only one of the GPI’s 14 tracked categories to show higher yearly prices, but its move into inflation is significant as it houses over 16,000 SKUs (more than 25% of the 60,000+ collected by BrandView across the big four to measure inflation).

Also significant was that this ambient inflation was almost wholly driven by Tesco, whose dry grocery prices rose 3.6% in the month to 1 October - while dry grocery prices at its big four rivals kept falling.

Tesco has now seen dry grocery prices rise in three of the last four months. But the whole category moved into inflation last month as ambient price cuts also eased in the other three supermarkets.

The move back into category inflation in ambient goods is surprising, given suppliers in fresh, short-dated produce are likely to feel the effects of rising costs more quickly than ambient producers.

Indeed, wholesaler Reynolds warned this week that salad inflation will hit UK retailers over the winter, given the fall in sterling post-Brexit, as most of it is imported. But GPI fruit & veg currently remains 2.3% lower than last year, while meat, fish and poultry is 3.7% lower and dairy 3.8% down.

That’s because the price war has particularly concentrated on fresh produce over the past year, while deflation in dry grocery hit its peak in the month to 1 March 2015 (-2.9%).

Tesco in particular appears to have focused much price action on its new Farms brands, with meat, fish & poultry prices down 5.6% year on year last month after peaking at -9.1% in the month to 1 June 2016.

The rise in ambient cut the overall GPI figure back to -1.64% in the month to 1 October from -2.54% in the previous month. The current GPI figure is the lowest deflation recorded since the month to 1 June 2015.

Sainsbury’s again saw the largest year on year deflation at -2.5%, followed by Morrisons (-2.2%), Asda (-1.4%) and Tesco (-0.8%).

And despite the drop in overall deflation, prices across the big four were down another 0.2% month on month. Annual deflation eased because the post-summer price cuts seen last year haven’t materialised to the same extent in 2016.

Tesco CEO Dave Lewis this week said deflation was likely to persist for the foreseeable future despite the weakening pound and rising commodity costs.

“We still see some deflation in the marketplace and we think we will continue to face that reality, certainly into the short term,” he said.