David Prosser: Supermarkets pay, rather than employers

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Outlook One of the most surprising things about the unexpected drop in inflation during March, as revealed by the Office for National Statistics yesterday, is its cause: a marked fall in food prices during the month even though the cost of raw foodstuffs was continuing to rise.

The explanation appears to lie in the bitter price wars that the big supermarkets have been waging against each other since the start of the year. And it is good news for a number of reasons – not the least of which is that for many people, the default reaction when grocers claim to be cutting prices is a roll of the eyes followed by a forensic examination of till receipts to work out which prices have risen to pay for the discounts advertised.

The big fear about inflation – one which the Bank of England has been monitoring very closely since price rises began accelerating – is that it prompts people to demand larger pay rises in order to protect their real disposable incomes. If those demands are met, an inflationary cycle can develop that is very hard to break.

There has been no sign of this in recent months. Pay settlements have crept up slightly, but this is what you would expect during the upswing from recession. Overall, wage growth has been very muted.

The evidence from the inflation figures is that hard-pressed households have been demanding more from their supermarkets instead – that is, protecting their disposable incomes by refusing to pay higher prices for groceries rather than trying to persuade their employers to open their wallets.

Price wars are only sustainable for the short term – and there is still reason to be sceptical about the idea that supermarket margins are taking a big hit – but this is a happy development. Meaner wage settlements enable the Bank's Monetary Policy Committee to keep interest rates lower for longer. And if consumers aremaking up the difference courtesy of the grocers, so much the better.