Inflation down again - as high street delivers mixed results

As retailers continue to push down prices, inflation falls again - but not as much as expected.

Last Updated: 06 Nov 2012

The Consumer Prices Index dropped to 1.6% in August, according to the Office for National Statistics. That's a 0.2% fall, meaning that the headline rate of inflation is now at its lowest level for nearly five years (since February 2005). On the other hand, this wasn’t as big a drop as the City expected – and the alternative Retail Prices Index measure, which factors in mortgage costs, actually rose from -1.4% to -1.3%. Bank of England governor Mervyn King now thinks that the UK economy is growing again, which will come as a relief to retailers like Debenhams…

The ONS said that lower food costs pushed inflation down last month, while gas and electricity bills also exerted downward pressure, hardly changing at all month-on-month. But the fact that CPI was higher than the forecast 1.4% was largely down to transport costs – notably the prices of second-hand cars, which are rising at their fastest ever rate, believe it or not. It certainly seems to have left Merv feeling a bit more cheerful: speaking to the Treasury Select Committee this morning, the Governor admitted that inflation was likely to bob around the Bank’s 2% target for a while yet, but said ‘there are signs that activity is picking up’.

It’s clearly still hard work for retailers. The BRC reckons takings in London’s West End are down almost 6% on the equivalent figures a year ago (a slump not seen since the July 2005 terror attacks), while Debenhams said today that its like-for-like sales were down 3.8% in the six months to August 29. It blamed the disruptive impact of converting 530,000 sq ft of trading space from concessions to own-bought ranges, which has not surprisingly affected sales – after all, the sound of hammering and drilling is the last thing you need when trying to find a last-minute wedding outfit during your lunch break.

On the other hand, shoppers are still spending. Debenhams’s gross transaction value was actually up 0.2% during the period, helped by the success of its (higher-margin) own-brand ranges. And despite the turmoil, it’s expecting full-year profits to be ahead of last year, thanks to better costs and stock control. So it seems to have done a pretty good job of tailoring its offering to the recession-hit punter, and it’s now starting to reap the rewards. Other retailers – including such unlikely candidates as Sports Direct – are doing the same.

So it does seem that shoppers are getting their mojo back, which is likely to help tame deflation. Good news for Mervyn King – who might not have to pen a letter to Chancellor Alistair Darling to explain why inflation has fallen beneath 1% - and good news for the economy as a whole. Unless of course we’re all still spending money we haven’t got...

In today's bulletin:

Inflation down again - as high street delivers mixed results
Banks failing to heed the lessons of Lehman
Editor's blog: The childishness of the cuts debate
Can offsetting help SMEs avoid redundancies?
Books Special: The colossal failure of Lehman Brothers

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