Barring any unexpected spikes, food price deflation is finally upon us - but it may not necessarily be a good thing for UK stores, reports James Ball


All year, pundits and consumers have been expecting deflation to hit grocery. Yet while prices have fallen year-on-year across the UK as a whole, food has remained the exception until now.

The latest figures from The Grocer Price Index, covering November, show prices are down slightly month-on-month, by 1%. This was mirrored by a fall in annual inflation, which now stands at 2.8%, the lowest level since March 2008.

More dramatic shifts are imminent, reveals our latest GPI graph. Last November, food inflation was at an already hefty 12.3%. Within just four months, that had soared to a peak of 18.2%.

Unless there is a completely unanticipated price spike this month or next, grocery deflation will finally be upon us.

As OC&C strategy consultant chairman Chris Outram told The Grocer last week, that may not be a great thing for retailers.

Deflation makes funding the aggressive pricing strategies used by supermarkets slightly easier for retailers and manufacturers alike but without inflation-boosting sales figures, supermarket like-for-likes won't look quite as strong as they have in 2009.

This, Outram believes, will spark still more aggressive price war-style tactics from the retailers as growing share becomes the only way to grow like-for-likes. Such tactics could create the perverse scenario of falling costs and falling margins in the food sector.

The other key question on deflation the multimillion pound question is how long deflation will last. The signs suggest falling consumer prices will be short-lived. Growing global demand for many key foodstuffs is pushing up prices, with sugar, palm oil and cocoa among a group of commodities already considerably more expensive year-on-year. As the economy recovers, oil prices are set to rise, and the weak pound is a continuing cost pressure.

Last year was dominated by soaring food inflation. This year has been the opposite and the incredible pricing volatility of recent years is set to continue right through 2010.

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