UK Inflation Bulletin: The Beast from the East will hit the high street

Simon-Kucher & Partners Inflation Bulletin

Inflation dropped to 2.7% in February but prices are still rising above Bank of England’s target rate of 2% across most categories

Whilst the start of January is a time of year when many businesses put through prices increases, we expect more of this has been picked up in the February numbers. This year we expect overall price increases to be at the highest level of recent years.

We’ve moved back into an inflationary environment, so arguments for general increases hold more sway.

Critically, post referendum cost impacts are still filtering through

  • After the referendum and the sudden drop in the value of the pound, many companies actually held off price increases – they had short to mid/term protection through hedging or contracts, and simply delayed action with a “wait and see” approach
  • Companies can no longer afford to have their profit margins squeezed and so many feel a need to raise their prices
  • Price increases are not always immediately visible, but also come in the form of reduced promotions and shrinkflation – where the product gets smaller but the price remains the same
     

The Beast from the East will have a knock on effect on clothing prices later in the year

With spring/summer 18 collections already in stores, and arctic conditions deterring shoppers from picking up clothes for warmer weather, we expect heavier discounting later in the season as stores try to clear their stocks.

The high street has been prone to over stocking in recent years, and that tends to drive more aggressive promotional activity. With spring delayed, we can expect stores who might have been hoping to increase full price sales feeling the pressure to increase discounting instead.

James Brown commented:
“A lot of retailers want to get out of the heavy discount/promotion cycle they’ve been trapped in for years – but initiatives to scale back discounting are likely to be put on ice thanks to the disruptive weather conditions we’ve seen over the past few weeks.”

 


Want to know more? Read our previous Inflation Bulletins

January 2018 | February 2018