Shop price inflation grew at its slowest rate in more than 18 months in January, according to the British Retail Consortium (BRC).
Discounts and lower prices for milk and tea saw shop price inflation fall to 2.9%, from 4.3% in December. The BRC said shop price inflation was now at its lowest level since May 2022.
The figures come as the official consumer prices index (CPI) measure of inflation, which looks at a wide range of goods and services, is predicted to fall sharply this year.
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CPI rose by 4% in the 12 months to December 2023. It is forecast to fall to 2% (or below) within the next four months.
Which items are falling in price?
According to the BRC, food inflation fell from 6.7% in December to 6.1% in January with rises in alcohol offset by a fall in the price of milk and tea.
Both fresh and ambient food prices registered a decline in their annual rate of growth. The former eased from 5.4% to 4.9%, while the latter — which refers to food cupboard items like jam and cereal — fell from 8.4% to 7.7%.
But it was non-food categories that were the main drivers of the decline in price inflation. Discounts after New Year helped to slow the rate of price increases for non-food products, which eased to 1.3%, down from 3.1% the month before.
Separate data from Kantar said food price inflation fell at a slower rate in January than the BRC research showed. The BRC index includes all retailers, while Kantar tracks supermarkets.
Kantar said that spending on alcohol fell by more than half compared with December, as many consumers took on “Dry January”. Almost 6% of beer packs sold in January were no or low-alcohol options, marking a jump from 4% at the end of last year.
What is the outlook for inflation?
Helen Dickinson, chief executive of the BRC, said slowing price rises were likely to be hampered by other cost pressures, such as implementing the higher National Living Wage, and an increase in business rates in April.
"Rising geopolitical tensions will also add to uncertainty and costs in supply chains. With a general election later this year, we want to see political parties outline how they will help unlock investment across the country, rather than the current trajectory, which is doing just the opposite," she said.
Nonetheless, inflation is forecast to fall sharply this year, potentially getting below 1% by the autumn. The predicted fall in the energy price cap is expected to push inflation down, and could even raise the possibility of deflation.
What does it mean for interest rates?
The Bank of England base rate is currently at 5.25%, having been held at this level for a fourth consecutive time on Thursday 1 February. Analysts expect the MPC to start chopping interest rates in May or June this year.
The MPC will want to see that inflation is starting to fall towards its 2% target before it lowers rates. Victoria Scholar, head of investment at Interactive Investor, comments: “As the Bank of England prepares to decide on interest rates this week, today’s figures provide further confirmation that inflation in the UK is moving in the right direction.
“However, food price growth in particular remains sharply above where the central bank would like it to be. While the disinflationary trend provides support for the case for rate cuts this year, there are still several unknowns including the outlook for energy prices, and the turmoil in the Middle East, both of which could lead to an unwanted resurgence in inflation.”
Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.
A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.
Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.
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