Grocer Price Index Graph

Inflation across the supermarkets is running at rock bottom levels - below 1% for the second month in a row.

Having been at more than 2% for most of 2013, average inflation at the top four, as measured by The Grocer Price Index, sunk to 0.71% last month and remained down this month at 0.96% on 1 March.

There was very little variation between the supermarkets. Tesco, Asda and Waitrose kept the tightest lid on inflation, with prices at each retailer just 0.9% up on last year.

Inflation at Sainsbury’s was a fraction higher at 1.1% and at Morrisons it was 1.2%.

Low levels of inflation are contributing to weak industry growth figures. This week, Kantar reported that the UK grocery industry had grown just 2.2% in the quarter to 2 March - representing the slowest industry growth since 2005.

High levels of promotional activity in some categories and falling commodity costs in others have kept inflation down.

Household and health & beauty are both showing deflation as a result of a sharp increase in branded promotions over the past year.

Meanwhile, falling prices of key commodities including wheat and other grains as well as sugar have helped keep inflation below 1% in a number of key categories including bakery, dry grocery and chilled.

Improved growing conditions have also helped bring fruit & veg inflation down from high single-digit levels in the first half of last year to just 1%.

Inflation has even fallen in meat, fish and poultry to 2.7% as it is now more than a year since the horsemeat scandal. Prices shot up directly after the scandal broke in February last year.

Despite the well-publicised cut in Tesco’s own-label milk prices, which sparked copycat price cuts across the multiples last week, the category showing the highest level of inflation was dairy - at 2.9%. Milk, cheese and butter commodity prices have risen by double digit amounts (see below) - partly as a result of poor weather conditions over the past two years.

On Wednesday, Ocado chief financial officer Duncan Tatton-Brown played down the likely impact of Tesco’s pricing initiatives on overall inflation.

“They say they will invest £200m in pricing. I don’t think it will materially move the dial at Tesco and therefore not elsewhere,” he told The Grocer.

However, the price investment implied in Morrisons’ low profit profit guidance on Thursday re-ignited fears of a price war, which will put further downward pressure on inflation this year.

Global demand keeps dairy powder prices up

Dairy powder prices remain high thanks to strong global demand. Skimmed milkpowder is up by 21.4% year on year and up 1% month on month to £2,794/tonne, with whole milk powder up by nearly 20% on this time last year to £3,093/tonne, despite prices softening somewhat over the past month.

Eggs and Dairy prices table

Although butter prices in the UK continue to be up by 11.5% year on year, milk production is increasing seasonally, which has started to put pressure on butter prices on a month-on-month basis. Prices are now down 7.4% on last month, to about £3,067/tonne.

In the egg market, meanwhile, UK shell egg prices are down thanks to good supply and lower demand coupled with lower feed costs, with the same dynamics also keeping prices down on egg yolk powder across Europe.

By contrast, EU prices for shell eggs for processing are rising because of current high global demand for egg whites.