The British Retail Consortium has found that food prices have fallen for the first time since it began recording the data in 2006.
Mirroring recent findings of the Grocer Price Index, the BRC found that the level of food price inflation is continuing to drop after recording a 0.2% price fall in November (against a 0.1% rise in October).
The BRC’s first ever recorded monthly food deflation comes as global oil prices are positing dramatic falls. The rapidly falling crude prices have affected global equity markets, but are unlikely to have fully filtered through to the price of consumer goods yet.
In short – food prices are falling, but they still have further to go down
Helen Dickinson, British Retail Consortium Director General, commented: “Falling commodity prices, particularly oil, suggests the outlook for inflation remains benign. The price of oil, a near five year low, has a significant impact on the costs of producing food, impacting everything from the cost of feed to transport.
“The strong pound has also helped keep prices low as imports are now cheaper and it’s worth remembering that the UK gets roughly a quarter of its food beyond its shores.”
These macro-economic trends should constrain any immediate inflationary pressure for food, but there are also more sector-specific pressures at work.
The first is clearly the UK supermarket “price war”, which is difficult to quantify in terms of its deflationary impact, but the BRC notes that the investment in price cuts and highly competitive market are helping to keep inflation low.
Secondly, there continues to be downward inflationary pressure from the vast majority of agricultural commodities.
While coffee, cocoa and cattle remain up year-on-year, these have been concerted falls in global prices for pork, wheat and corn. This helps to explain why overall food deflation – and a significant chunk of supermarket price cuts – has been concentrated on the fresh and ambient categories (November was the first month ambient reported annual price deflation).
In fresh foods, downwards pressure particularly came from the milk, cheese & eggs, vegetables and fish, all of which reported annual deflation and outweighed inflation in the oils and fats, meat and fruits categories.
So is this low inflation environment causing further pain for the supermarkets – which have traditionally relied on food inflation to help boost like-for-like sales?
Not necessarily. One potential bright spot on the horizon is that – as non-food prices are down by 2.9% and falling oil prices bring down motoring and heating costs – UK consumers could finally see an improvement in their cost of living and a boost in spending power.
Shore Capital’s Clive Black asks: “A big question for 2015 for the grocer’s, therefore, is will rising living standards lead to a much prayed for return to volume growth by executives of the Big Four?”
Cautioning that other pressures have helped depress food volumes – such as increased food consumption outside the home and falling food waste – Black strikes a note of cautious optimism.
“There could be perhaps the strongest basis for some time to suggest that the UK supermarket scene may see positive volume growth in 2015; boosted, of course, by favourable multi-year comparatives,” he concludes.