Commodities push up shop prices

6 October 2010

Overall shop price inflation increased marginally in September to 1.9% from 1.7% in August, taking it to the highest rate for five months

Food inflation increased to 4.0% in September from 3.8% in August

Non-food inflation increased to 0.7% from 0.5% in August

Overall SPI		Food		Non-food
September - % change on year ago
1.9%		4.0%		0.7%
Aug: 1.7%		Aug: 3.8%		Aug: 0.5%

Overall SPI

Stephen Robertson, British Retail Consortium Director General, said:

"Past increases in commodity prices are now putting pressure on overall shop prices but the worst of this may have passed.

"Food inflation is at a 15-month high as the effect of earlier rises in wheat and oil prices work through to things like bread and meat but these production costs appear to be stabilising now.

"Clothing was largely responsible for non-food inflation increasing for the first time in five months. Clothing is still cheaper than a year ago, and 15 per cent cheaper than five years ago, but rising cotton costs have slowed the pace of those price falls.

"Even so, weak demand, poor consumer confidence and strong competition between retailers are likely to hold back shop price inflation for the rest of the year."

Mike Watkins, Senior Manager, Retailer Services, Nielsen comments:

"We are seeing commodity price increases in grain and oils feeding into increased shop prices in grocery categories such as dairy, bread, biscuits and cereals. And, with consumers remaining cautious about spending, this is coinciding with a slight slowdown in volume sales. So food retailers have compensated by increasing the level of promotional spend in recent weeks. Despite an increase in some non-food prices in September, prices overall in non-foods are still three per cent lower overall than they were five years ago."

Detailed Analysis

% Change		Overall SPI			Food			Non-food
		On last year		On last month		On last year		On last month		On last year		On last month
September		1.9		0.2		4.0		0.1		0.7		0.3
August		1.7		0.1		3.8		0.2		0.5		0.1

The BRC-Nielsen Shop Price Index (SPI) rose to 1.9% in September from 1.7% in August, as non-food inflation rose for the first time in five months. Food inflation increased to 4.0% from 3.8% in August, while non-food inflation climbed to 0.7% from 0.5%.

Inflation remained cost-driven in September, as commodity price shocks continued to filter through the supply chain. Ambient foods such as bread and cereals were the primary drivers of food inflation, while clothing and footwear prices pushed up non-food inflation by 0.3% on August. The combined impact resulted in a slight increase in the overall index of 0.2 percentage points.

Sharp rises in wheat, oil and corn prices, since early August, have been the main contributors to food inflation, particularly food products which contain flour or corn. Although these commodity prices continued to rise in September, recent stability in the price of wheat and corn futures may indicate that a price ceiling has been reached. While food price growth is likely to remain an inflationary concern in the near future, the deceleration in September, with prices rising only 0.1% from August on a month-on-month basis, indicates that retailers remain highly competitive and are minimising the impact passed on to consumers.

Non-food inflation was primarily driven by higher prices in the clothing sector compared with the previous month. Following a period of heavy discounting during the summer months, fully-priced new season ranges signalled a short break from promotional activity. However, as competition intensifies in the run-up to Christmas, we expect to see a return to low and stable non-food inflation, and an emphasis on deals and discounting.

Non-food inflationary pressure will return in the New Year as higher cotton prices, up 69% on last year, are factored into spring/summer collections. A number of large retailers have already warned of price rises in the range of 5-8%, while one retailer singled out children’s clothing as a primary area of concern due to its high cotton content. However, there are clear signs that cotton price fears may be exaggerated. The United States Department for Agriculture (USDA) reported that despite production shortages in China and Pakistan, cotton production grew in the US and Australia and in India by 12%. Moreover, the production-consumption gap is expected to decline to 3.5 million bales in 2010/11 from 16 million bales in 2009/10, as cotton producers react to higher prices by allocating an extra 32.9 million hectares to cotton production, up 9% on the previous year. The combined impact of higher cotton prices and the new 20% VAT rate will put pressure on non-food inflation in the first half of 2011.

Inflation in the wider economy remained above target for the ninth consecutive month in August. The Bank of England maintains that the levels of spare capacity in the economy are exerting sufficient downwards pressure on price levels, while factors such as the VAT hike and a weaker pound continue to cause a temporary divergence from trend. Nevertheless, as inflationary expectations remain embedded above 2% for the third quarter, it is possible that the Bank is under-appreciating the risk of higher inflation. The latest GfK-BoE Inflation Expectations report found median inflationary expectations for next year to be 3.4%, up from 3.3% in May and 2.9% in February.

However, with substantial government spending cuts on the horizon and continuing constraints on the supply of bank lending, GDP risk remains firmly rooted in the downside. As a result, we expect inflation to remain low for the remainder of 2010, driven by weak demand, poor consumer confidence and strong competition in the retail sector.

BRC-Nielsen Shop Price Index

Graph 1: http://www.dodsmonitoring.com/downloads/image1.gif

Food

% Change		Food			Fresh			Ambient
		On last year		On last month		On last year		On last month		On last year		On last month
September		4.0		0.1		3.3		0.0		5.0		0.2
August		3.8		0.2		2.7		0.0		5.6		0.6

In September, annual food inflation rose to 4.0% from 3.8% in August. This is the third consecutive month overall food inflation has increased and is the highest rate reported since June 2009 when food inflation reached 5.6%. Inflation in the ambient food category remained high, although slowed from the 5.6% reported in August. Fresh food inflation rose to 3.3% from 2.7% in August.

On a month-on-month basis prices rose marginally, up just 0.1% from 0.2% in August.

		Commodity
		On last year
Wheat		+45%
Corn		+42%
Soya Beans		+19%
Cocoa		-7%
Cattle		+15%
Lean Hogs		+53%

Source: Financial Times

Fresh Food

Annual inflation in the fresh food category accelerated to 3.3% in September from 2.7% in August. This is the third consecutive month to report a rise in inflation. Downward pressure came from the convenience food sub-category which was the only sub-category to report slowing inflation in September. Significant upward pressure was exerted by the oils and fats sub-category where inflation jumped to its highest since September 2008, though this was against weak comparisons a year ago. The fruits and vegetables sub-categories also exerted considerable upward pressure, reporting annual inflation higher than the overall fresh food index.

On a month-on-month basis, prices were broadly flat for the second consecutive month.

Ambient Food

Inflation in the ambient food category slowed in September to 5.0% from 5.6% in August. Upward pressure was exerted by the breads and cereals sub-category where inflation rose for the second consecutive month. This was the only sub-category to report a rise in its inflation rate. Inflation in the sub-category containing sugars, jam and chocolate remained high, as did that for alcoholic beverages. Both reported inflation higher than the overall ambient food category. Downward pressure came from the non-alcoholic beverages sub-category. While a sharp rise in commodity prices has filtered through to ambient food inflation in recent months, the rate for the overall ambient category in September is only 0.1 percentage points higher than the three-month average of 4.9%. The competitiveness of the food industry is likely to keep prices from rising further.

In September prices increased 0.2% on a month-on-month basis, after rising 0.6% in August.

BRC-Nielsen Shop Price Index: Food

Graph 2: http://www.dodsmonitoring.com/downloads/image2.gif

Non-food

% Change	September		August
	On last year	On last month	On last year	On last month
Clothing & Footwear	-0.7	2.0	-2.6	-0.6
Furniture & Floorcovering	-0.2	-0.5	0.5	0.6
Electrical	-2.6	-0.1	-2.8	-0.1
DIY, Gardening & Hardware	3.7	0.2	3.7	0.0
Books, Stationery & Home Entertainment	-1.0	-0.3	-0.5	0.0
Health & Beauty	2.2	-0.1	2.7	-0.1
Other Non-Food	2.1	-0.1	2.3	0.5
Total Non-Food	0.7	0.3	0.5	0.1

Annual inflation in the non-food category increased to 0.7% in September from 0.5% in August, the first increase in five months. Upward pressure was exerted by the DIY, gardening and hardware and health and beauty sub-categories. The clothing and footwear category reported a significant slowdown in its deflation rate, falling to its lowest level for three months. Downward pressure was exerted by the electricals sub-category which has reported annual deflation in every month since the series began.

Year-on-year changes in non-food by sector

Graph 3: http://www.dodsmonitoring.com/downloads/image3.gif

Clothing & Footwear

Annual deflation in the clothing and footwear category slowed in September to 0.7% from 2.6% in August. This is the lowest level of deflation since June and is now significantly lower than the three-month and 12-month averages of 1.5% and 1.8% respectively. Clothing accessories continued to apply upward pressure on the overall category, along with men’s and children’s clothing where prices rose in September after falling in August. Some of this pressure was offset by the footwear sub-category which reported an acceleration in its deflation rate. Women’s clothing was the only other sub-category where prices fell in September. Increased pressure from a rise in supply-chain and raw materials costs is likely to put pressure on retailers’ margins. Retailers who specialise in low-cost, fast-fashion clothing, are likely to face the greatest challenge as they try to balance these rising pressures while remaining competitive.

On a month-on-month basis prices increased 2.0% in September after falling 0.6% in August. This is the highest monthly increase since the series began in December 2005.

Furniture & Floorcovering

In September, annual deflation in the furniture and floorcoverings category was 0.2%, less than the 0.5% in August. This marginal fall was driven by slowing inflation in the furniture and furnishings category while the household textiles sub-category remained deflationary, albeit to a lesser extent than in August. Renewed housing market weakness is bad news for this sector which relies heavily on the number of housing moves. The latest data from the Bank of England showed mortgage approvals fell for a fourth consecutive month and is now the weakest since February. Data from the Nationwide Building Society was also downbeat, showing house prices rose just 0.1% in September from August. However the three-month average (seen by many as a better indicator of housing market performance) fell by 0.9%, the first fall since May 2009. While this is nowhere near as severe as the collapse in 2008, it is clear that the housing market is likely to remain fragile well into 2011.

On a month-on-month basis price fell 0.5% in September after rising 0.6% in August.

Electricals

In September, annual deflation in the electricals category slowed marginally to 2.6% from 2.8% in August. Deflation in this category has been relatively stable over the last three months with very little movement in the overall index. Consumer confidence, as reported by GfK, fell back in September after a surprise rise in August, confirming what many thought was a blip. This is the second weakest figure of the year, caused by a fall in both personal and economic expectations. Consumer uncertainty has grown as the announcement on public sector spending cuts looms. The only component to report a rise in September was the climate for major purchases. This was probably driven by consumers looking to make their big purchases before VAT rises to 20% in January which is likely to boost sales in the short-term.

On a month-on-month basis prices fell by -0.1% for the second consecutive month.

DIY, Gardening and Hardware

Annual inflation in the DIY, gardening and hardware category remained at 3.7% for the second consecutive month. Inflation is now considerably lower than both the six-month and 12-month averages of 4.7% and 5.1% respectively. While annual inflation in the tools and equipment category increased slightly in September, deflation in the glassware, tableware and household utensils sub-category accelerated.

Prices rose 0.2% in September after being broadly flat in August.

Books, Stationery and Home Entertainment

Annual deflation in the books, stationery and home entertainment increased in September to 1.0% from 0.5% in August. This is the first time deflation has accelerated in this category after slowing for five consecutive months. Slowing deflation in the home entertainment category was offset by an acceleration in the deflation rate of books and newspapers and slowing inflation in the stationery sub-category.

Prices fell for the first time since April, on a month-on-month basis to -0.3% after being broadly flat in August.

Health & Beauty

In September annual inflation in the health and beauty category slowed to 2.2% from 2.7% in August. This is the lowest level of inflation since April 2010 and is considerably lower than the 6-month and 12-month averages of 2.6% and 2.7% respectively. Upward pressure was exerted by the personal care sub-category which reported an increase in its inflation rate. This was offset by the toiletries and cosmetics sub-category which reported a sharp fall in its inflation rate, to the lowest since January 2008.

In September prices fell 0.1% month a month-on-month basis for the second consecutive month, after increasing 0.4% in July.

Other non-food

Annual inflation in the other non-food category fell to 2.1% in September from 2.3% in August.

On a month-on-month basis prices fell 0.1% after rising 0.5% in August.

BRC-Nielsen Shop Price Index: Non-Food

Graph 4: http://www.dodsmonitoring.com/downloads/image4.gif

Data Tables

Year-on-year % Change	Overall	Non-Food	Food	Fresh	Ambient
Sep 09	-0.1	-1.4	2.5	0.8	4.9
Oct	0.0	-1.3	2.5	1.3	4.3
Nov	0.2	-1.2	2.8	2.6	3.2
Dec	2.2	1.4	3.7	2.6	5.4
Jan 10	2.3	1.9	2.9	1.4	5.1
Feb	1.7	1.9	1.3	-0.3	3.6
Mar	1.2	1.3	1.2	0.5	2.2
Apr	2.0	2.0	2.0	1.2	3.0
May	1.8	1.6	2.2	0.7	4.4
Jun	1.5	1.4	1.7	0.1	4.1
July	1.5	1.0	2.5	1.4	4.1
Aug	1.7	0.5	3.8	2.7	5.6
Sep	1.9	0.7	4.0	3.3	5.0

Month-on-month % Change	Overall	Non-Food	Food	Fresh	Ambient
Sep 09	0.1	0.1	-0.1	-0.7	0.8
Oct	-0.04	0.0	-0.1	0.2	-0.4
Nov	0.3	0.1	0.6	1.3	-0.5
Dec	0.0	0.0	0.2	0.2	0.1
Jan 10	0.2	-0.2	1.0	0.3	1.9
Feb	0.6	0.7	0.4	0.3	0.5
March	0.0	0.0	0.0	0.1	-0.2
Apr	0.3	0.2	0.5	0.3	0.7
May	0.3	0.2	0.4	-0.3	1.6
Jun	-0.1	0.0	-0.1	0.0	-0.4
July	-0.1	-0.6	0.9	1.0	0.7
Aug	0.1	0.1	0.2	0.0	0.6
Sep	0.2	0.3	0.1	0.0	0.2

Year-on-year % change	Clothing & Footwear	Furniture & Floorcovering	Electrical	DIY, Gardening & Hardware	Books, Stationery & Home Ents	Health & Beauty	Other Non-Food
Sep 09	-5.7	-2.6	-4.4	2.0	-2.1	3.3	1.5
Oct	-5.3	-2.0	-4.8	1.9	-2.5	1.7	2.3
Nov	-5.5	-1.2	-4.4	2.0	-3.7	2.3	1.9
Dec	-3.3	0.2	-1.6	7.8	-1.4	4.2	4.6
Jan 10	-1.4	1.2	-2.0	7.8	-2.1	3.5	4.7
Feb	-0.8	1.8	-2.5	7.6	-1.9	2.7	3.9
Mar	-0.9	1.0	-2.0	6.5	-2.9	2.3	2.9
Apr	0.7	3.0	-2.3	6.5	-2.0	2.1	2.7
May	-0.7	3.7	-2.5	5.0	-1.5	2.4	2.2
Jun	-0.1	1.0	-2.0	4.7	-0.8	3.0	3.5
July	-1.2	-0.4	-2.5	4.8	-0.6	3.0	3.0
Aug	-2.6	0.5	-2.8	3.7	-0.5	2.7	2.3
Sep	-0.7	-0.2	-2.6	3.7	-1.0	2.2	2.1

Month-on-month % change	Clothing & Footwear	Furniture & Floorcovering	Electrical	DIY, Gardening & Homeware	Books, Stationery & Home Ents	Health & Beauty	Other Non-Food
Sep 09	0.1	0.2	-0.4	0.3	0.2	0.4	0.1
Oct	0.7	-0.6	0.1	-0.2	-0.2	-1.0	0.3
Nov	-0.1	0.7	-0.2	0.5	-0.9	0.8	-0.3
Dec	-0.6	-0.2	-0.6	1.0	-0.5	0.3	0.3
Jan 10	-1.0	-0.4	-0.6	0.7	-2.1	1.0	0.6
Feb	0.8	1.0	0.2	0.2	0.9	1.0	0.6
Mar	0.3	-0.6	0.3	0.2	0.6	-0.5	-0.3
April	-0.2	1.4	-0.8	0.3	-0.2	0.2	-0.1
May	-0.4	1.0	0.1	0.0	0.6	-0.4	0.6
Jun	0.6	-1.5	-0.4	0.5	0.6	0.1	0.0
July	-2.2	-1.1	-0.6	0.3	0.5	0.4	-0.1
Aug	-0.6	0.6	-0.1	0.0	0.0	-0.1	0.5
Sep	2.0	-0.5	-0.1	0.2	-0.3	-0.1	-0.1

Index	Overall	Food	Fresh	Ambient	Non-Food	Clothing & Footwear	Furniture & Floorcovering	Electrical	DIY, Gardening & Hardware	Books, Stationery & Home Ents	Health & Beauty	Other Non-Food
Sep 09	102.74	117.20	117.72	116.39	96.03	85.47	94.76	82.62	105.89	97.90	103.25	105.47
Oct	102.70	117.14	117.92	115.93	96.00	86.05	94.23	82.67	105.65	97.70	102.27	105.83
Nov	103.00	117.83	119.44	115.40	96.13	85.98	94.92	82.51	106.20	96.83	103.08	105.53
Dec	103.03	118.02	119.66	115.54	96.09	85.44	94.73	82.03	107.25	96.36	103.34	105.81
Jan 10	103.28	119.17	120.07	117.78	95.94	84.60	94.36	81.54	108.01	94.32	104.35	106.48
Feb	103.88	119.59	120.37	118.37	96.61	85.31	95.32	81.72	108.25	95.20	105.35	107.17
Mar	103.85	119.59	120.54	118.11	96.58	85.59	94.79	81.99	108.44	95.77	104.83	106.85
Apr	104.14	120.18	120.96	118.96	96.73	85.38	96.16	81.36	108.74	95.61	105.03	106.70
May	104.44	120.68	120.55	120.85	96.64	85.03	97.09	81.45	108.69	96.20	104.63	107.37
Jun	104.37	120.50	120.56	120.36	96.91	85.55	95.60	81.13	109.08	96.68	105.23	107.43
July	104.29	121.53	121.73	121.18	96.32	83.69	94.51	80.65	109.45	97.16	105.68	107.36
Aug	104.42	121.80	121.68	121.93	96.39	83.20	95.06	80.59	109.49	97.16	105.62	107.85
Sep	104.64	121.87	121.64	122.19	96.69	84.87	94.60	80.51	109.76	96.90	105.50	107.73

Methodology

The SPI is administered by Nielsen, who collate and analyse the data on behalf of the BRC.

The index provides an indicator of the direction of price changes in retail outlets. The BRC launched the Shop Price Index to give an accurate picture of the inflation faced by shoppers on 500 of the most commonly bought items in shops which are representative of the most commonly shopped in stores.

As the Index is designed to reflect changes in shop prices, the sampling points chosen are five large urban areas, spread nationally. Not all sample stores are in city centres; they have been selected to reflect local shopping habits. Therefore, the sample includes superstores on out-of-town sites, town centre department stores, local parade stores, and shopping centres. In each location, Nielsen collect and process the data for the BRC, visit stores of differing types, e.g. grocery, confectionery, DIY, department stores - including small and large multiples and independents. Data collection is monthly and always in the same stores to maintain consistency.

The items for which prices are collected reflect standard consumer purchasing patterns in terms of branded/own label split and price distribution. The Index is constructed of five main sectors of purchase: food, hardware, furniture, electrical, clothing, and other goods. In total there are 500 items representing the five main sectors, there are around 6,500-7,000 price points collected each period. Each product class category has an individual weighting based on the “All households” expenditure measured in the Family Expenditure Survey. This data is also used to weight the Office for National Statistics Retail Price Index (RPI).

Although it is a proxy measure of inflation, the Shop Price Index is more focused than the Retail Price Index, and demonstrates the extent to which retailers contribute to inflation through their pricing of a range of commonly bought goods.

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