The VAT increase has brought inflation along with it, sending the average family food bill up £6 compared with December. James Ball reports


So much for falling food prices. This month's Grocer Price Index figures put paid to any hopes that falling inflation would not be stalled by January's VAT hike.

In theory, the VAT shift should have had virtually no effect: most food is exempt from the 17.5% tax but as an investigation by The Grocer showed earlier in the month, retailers used the increase to pass on some price rises even on non-VATable items.

Big January price promotions were not enough to offset this inflationary effect: food prices in January were 2.8% higher than in December an increase that led to food bills at least £6 a month higher for a typical family. This was the biggest month-on-month price hike since July 2008.

Annual food price inflation also increased for the first time since last March, jumping from 1.6% to 2.6% as price rises this January outstripped those of last year. Unsurprisingly, alcohol was the biggest contributor to the rise in prices, up a hefty 7.5% since last month. This is a typical January trend fuelled in large part by the sudden end of the large volume of Christmas drink deals at the start of the month but with drink prices up nearly 3% year-on-year, it's clear the VAT rise has also had a strong impact.

The decision by Asda and Tesco to focus promotions on staple lines also fuelled an increase in prices in the health and beauty category, which usually runs strong January offers in a bid to capitalise on New Year's resolutions. Health and beauty lines were up a hefty 5% month-on-month, but prices were broadly in line year-on-year.

The frozen category showed a surprising price shift. Prices here could have been expected to rise as Asda's year-long pledge to keep 100 lines at £1 expired but despite a month-on-month price increase, frozen food was almost 10% cheaper this January than last.

Those fearing that surging inflation marks a repeat of the punishing price rises of 2008 have little to fear, experts suggest at least not yet. Most key food commodities remain cheaper year-on-year, suggesting that inflation should stay steady for the time being.

But with commodities set to recover later in the year, that situation might not last long.

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