Predictions of higher food prices are yet to come to pass, but the deflation that has gripped grocery since 2014 has eased for the second consecutive month after the Brexit vote.

The Grocer Price Index, which measures over 60,000 SKUs across the big four supermarkets, found annual deflation moved to -2.36% in the month to 1 August from -2.77% in the month to 1 July. The latest figure represents the lowest level of annual price cuts so far in 2016 and is around 0.7 percentage points lower than the -3.07% recorded in the month to 1 June.

A steady rise in input costs seems to have slowed deflation - notably the strong increase in global oil prices after they collapsed late last year. With the post-Brexit fall in sterling forecourt fuel prices increased 0.8% last month, according to the latest Office of National Statistics figures this week, despite a slight fall in Brent crude following its H1 2016 rally.

On a month-on-month basis six of the 14 categories returned to inflation. The biggest category mover was dairy, with prices 3.1% higher across the big four and annual deflation fell from -4.8% in the month to 1 July to -3.5% last month. Monthly prices were also up in soft drinks (+1.7%), health & beauty (+1.6%) and fruit & veg (+0.9%).

Despite rumours of a new Asda-driven price war, annual price cutting fell for three of the big four during the month. The exception was Tesco, which cut annual prices by 3.8% - its highest deflation yet and its fourth consecutive month where prices fell 3%+. Its new Farms brands range was a big contributory factor, with meat, fish and poultry prices down 5.9% on last month. Tesco also reported strong deflation in alcohol (-6.3%), frozen (-4.6%) and household (-4.3%).

Conversely, both Morrisons and Sainsbury’s recorded their lowest annual price cuts so far in 2016 at 1.1% and 2.1% respectively, while Asda’s price drop was its lowest since the month to 1 February 2016 at 1.6%. Morrisons’ pledge to cut the price of more than 1,000 SKUs on 1 August did not significantly boost its annual deflation, but on a month-on-month basis Morrisons’ prices were 2.9% lower, compared with a rise of 0.4% at Sainsbury’s and 0.1% at Asda. Tesco was 1.7% cheaper. Waitrose, not included in the overall GPI figure, was 2.1% cheaper year-on-year.

This week’s ONS survey found overall UK inflation hitting its highest point for almost two years.

The Consumer Prices Index rose to 0.6% in the year to July, up from 0.5% last month, driven higher by increased petrol prices and a lessening of food price deflation.

Source

Alec Mattinson

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