Declining clothing and furniture costs have helped push shop prices down by the fastest rate in more than three years, offering some light relief to households struggling with inflation and the cost-of-living crisis.
The latest figures from the British Retail Consortium (BRC) show shop price deflation was -0.6% in September, down from -0.3% the month before. This is the lowest rate since August 2021. Non-food categories have been the main driver.
Despite this, households will notice increases in some categories – notably food. Food inflation accelerated from 2% to 2.3% in September, while fresh food inflation jumped from 1% to 1.5%.
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“September was a good month for bargain hunters as big discounts and fierce competition pushed shop prices further into deflation,” says Helen Dickinson, BRC chief executive. Despite this, she notes that “poor harvests in key producing regions” were the main driver of higher food inflation, impacting cooking oils and sugary products.
Shoppers may have to get used to price shocks in their basket of groceries as the effects of climate change become more exaggerated. Last Easter, for example, the cost of chocolate soared after high temperatures and drought wreaked havoc on the cocoa crop in West Africa, causing cocoa prices to spike.
Is the cost-of-living crisis over?
Shop prices might be falling, but the cost-of-living crisis is far from over. Although the Consumer Prices Index hit the Bank of England’s 2% target in May this year, it has since inched up to 2.2% and is set to rise further later this year.
Rising energy prices are likely to be the main driver of higher inflation this autumn and winter, with the Ofgem price cap surging 10% from today (1 October). This will cause the average household energy bill to rise by £149 a year, although this figure will vary depending on your usage.
On top of this, households are still battling higher borrowing costs after the Bank of England held interest rates at 5% last month. Mortgage rates have fallen from their highs last year, but remain elevated compared to where they were in the late 2010s. The average two-year fixed-rate mortgage now costs 5.40%, according to Moneyfacts, while the average five-year deal costs 5.07%.
Furthermore, the government could unleash further pain for households later this month when it delivers its Budget, which prime minister Keir Starmer has warned will be “painful”. Chancellor Rachel Reeves is expected to unveil a series of tax rises to help plug a £22bn shortfall in the public finances.
Finally, while shop prices are falling, the global economy rests in a precarious position. Commenting on the latest drop, Dickinson warns that “ongoing geopolitical tensions, climate change, and government-imposed regulatory costs could all reverse this trend”.
What do falling shop prices mean for interest rates?
Although inflation is not yet in the rearview mirror, falling shop prices are a good sign that the economy is continuing to normalise. It is another step in the right direction as the Bank of England decides on the right time to exercise a second interest rate cut.
The most important areas the Bank is watching at present are wage growth and services inflation. Both measures are on a downward trajectory overall (despite a slight uptick in services inflation in August), but remain elevated at 5.1% and 5.6% respectively.
Wages are a big driver of inflation, as they push costs up for businesses. In turn, businesses tend to pass this on to consumers by putting prices up. Meanwhile, services inflation is an important measure for the Bank of England as the services sector accounts for around 80% of the UK’s economic output.
Despite stickiness in these two areas, markets and economists are hopeful that we will see another interest rate cut before the year is out. The Monetary Policy Committee (MPC) has two remaining meetings in 2024.
A survey by the news agency Reuters shows that over 75% of economists (49 out of 65) expect to see one more cut in 2024. A smaller group (16 out of 65) expect two more cuts before the year is out.
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