No return to inflation – just yet

No return to inflation – just yet

The dramatic currency depreciation in recent weeks has signposted that price increases are on the horizon – but that’s as far as it goes for the moment. The potential impact of these price increases aren’t being felt by shoppers yet as prices continue to fall across food and non-food items, and are likely to continue to do so until the end of the year.

It’s too soon to see significant supply chain cost increases being passed on by supermarkets and no retailer would wish to increase prices, or be seen as the first to do so, just before Christmas. However, the recent public discussions between a leading UK retailer and a global manufacturer signal that tension in now building in the supply chain.

January, however, is a convenient window for the industry to reset prices.

It’s the slowest month of the year for food retailers and coincides with a pressure to protect margins after the frenzy of Christmas trading.  For many manufacturers and suppliers it’s the ‘annual price increase ‘review and with volume growth finally returning to some of the big supermarkets, there is the chance to link a price increase to overall  trading terms.

Without a doubt, shelf prices will have to increase by around Q1 2017 as currency changes, the impact of weather on agricultural harvests and the price of crude oil finally feeds through to retailers. Later in the year we could even see the 3rd inflation shock of the decade with food and drink prices again rising by 4% to 5%; the previous shocks being after the 2009 Global Economic Crisis and the 2011 and 2013 commodity shortages due to inclement weather across the world.

The return of inflation will also trigger another change to retailer’s business models as it will simply not be possible to  absorb more costs following  the implementation of  the national living wage (April 2016) and increased investment in e-Commerce , click and collect and store renewals.

I think  most retailers are in a better place to manage the  impact of price increases than at the last recession and whilst deflation will finally come to an end, discounting and the growth of discounters  and ‘value retailers’ will continue in 2017. So the winner could still be the shopper.