Tesco cheese aisle

Tesco shares were boosted this week after Goldman Sachs suggested it was passing on less of the inflationary pressures to customers than its big four peers, but the Grocer Price Index has once again found Tesco’s annual inflation is outstripping the rest of the market.

Goldman’s upgrade of Tesco from sell to buy was primarily driven by Tesco’s superior cost savings programme, but the broker also pointed to Tesco’s ability to withstand inflationary price increases, albeit acknowledging these had been more in-line the market in recent months.

However, The Grocer Price Index, compiled from over 62,000 SKUs across the big four by Brand View, shows Tesco has consistently had the highest rate of industry inflation over the past five months.

In the month to 1 December, Tesco again shows the highest price rise on an annual basis, with its price inflation at 3.6% compared with a big four average of 2.5%. It is the fifth consecutive month Tesco has had the highest level of inflation of the big four and its fifth month of annual price rises over 3.4%.

In the first half of the year Tesco had delivered the lowest level of inflation for all but one month, suggesting it delayed price increases until the second half, of the year rather than avoiding passing on rising costs to customers. But since August Tesco’s annual price increases were significantly above industry averages in biscuits, confectionery and snacks at 6.6% against a 3.7% average, and were also higher in dairy (6.2% against an average of 4.7%), frozen (5.7% versus 3.8%), soft drinks (2.1% against 0.8%) and fruit & veg (3.1% against 2%).

Backing Goldman’s more positive view that margin pressure is easing in the listed grocery sector, big four price inflation fell for the second consecutive month, to suggest food price inflation may have peaked.

The overall GPI eased to 2.5% in the month to 1 December, compared with 2.8% in the previous month and a peak of 2.9% in the month to 1 October.

On a month-on-month basis, prices eased 0.5% last month and are down by 1.3% compared with the month to 1 October.

Tesco was considerably in front of other supermarkets in terms of price hikes. Asda’s annual inflation declined from 3.4% last month to 2.3%, with Sainsbury’s at 2% and Morrisons displaying the lowest level of big four price increases for the second consecutive month at 1.3%.

However, Waitrose - not included in the overall GPI calculation - had annual inflation of just 1.2%, its lowest level since the month to May 2017.

Although inflation seems to be falling back from its peak, food price inflation is likely to remain relatively strong over the coming months as the advent of rising food prices has not yet annualised.

The Brexit effect and sharp fall in the pound has driven inflation based on rising input prices for food and fmcg suppliers. However, a delay in the plunging pound filtering through to companies’ costs meant food prices were still falling at a rate of 1.4% a year ago and only moved into inflation in the month to 1 March 2017.

Recent GPI figures suggest supermarket inflation is in a period of relative stability as this is the fifth consecutive month of annual inflation of between 2.4% and 2.9%.

Rampant category inflation in meat, fish and poultry appears to be dissipating, with prices up 3.6% year-on-year having surged upwards by 5.5% in the previous month.

Dairy inflation is running at 4.7%, which is up from 3.7% last month but reduced from 5.9% in the month to 1 October. Other category risers include biscuits, confectionery and snacks (+3.7%), frozen (+3.7%) chilled (+3.6%) and deli (+3.4%).

Household goods remained in marginal deflation at -0.1%.

Month on month the biggest category changes were seen in deli (+3%), frozen (-2%), meat fish and poultry (-1.4%), dairy and bakery (both -1%).