UK inflation reaches highest level since June 2014
Rising inflation and the threat that it will rise much further is already damaging consumer confidence and now a majority believe that prices will rise in the next six months. The ONS reported that inflation reached 1.8% in January, and GlobalData expects this to continue to rise at a rapid rate, forecasting CPI to 2.5% in 2017, more than triple 2016’s level.
Consumer data from GlobalData highlights that 45.9% believe they will spend less on retail in the next six months (just 5.3% expect to spend more) – yet 52% expect prices to go up, primarily in fuel, utilities and supermarket food. Shoppers are choosing to reduce their spending, while product prices rise can only lead to pressure on volumes. GlobalData therefore forecasts that in 2017 total retail sales will lift 2.0% on 2016, though this will be inflationary driven with extremely modest growth in volumes at just 0.3%.
It is evident that consumers are already feeling the pinch with perceptions regarding the affordability of essentials declining in January and incomes becoming restricted due to rising costs – namely in fuel and selected groceries. The prioritisation of household spend will have the largest impact on big ticket items in 2017. In January 31% of consumers believed that now is a bad time to be purchasing items such as electricals and furniture, rising to 49.7% when looking at the 18-24 age segment, driven by prominently broadcasted price rises in products such as computers.
In contrast, however, younger consumers are less concerned about the impact of the rising prices on the whole, with their disposable incomes less tied up by household and family budgeting – making them a more lucrative audience for retailers to target and pass subtle price rises onto.
As a result of high inflation, consumers will be forced to prioritise spending on essentials, reducing discretionary income for sectors such as clothing – 20.9% of consumers expect to spend less on clothing over the next six months. Consequently, food & grocery will be the fastest growing retail sector, after health & beauty, forecast by GlobalData to grow by a yearly average of 3.2% over the next three years, where consumers will have no choice but to pay the higher prices. Clothing & footwear will see the highest inflation across the non-food sectors, reaching 2.5% in 2017, while volumes will rise by just 0.4%. In a highly competitive sector, retailers need to demonstrate value for money as they inch up prices to safeguard margins.
The prolonged effect of the weak pound on importing goods is beginning to impact retailers’ cost base as hedged currency runs out and they are forced to pass on price rises to consumers. Since margins have been eroded in recent years following significant levels of discounting and investment in the online channel, retailers have very little flexibility in margin reduction – making price increases inevitable. Several retailers including Next and Carpetright have admitted products will cost the customer more in 2017, while others claim they will hold prices (IKEA, Marks and Spencer) but will undoubtedly seek creative means to protect margins.