Retailers keep a lid on prices by containing VAT hike

Falling food prices and large-scale discounting and promotions by non-food retailers held down shop price inflation last month, despite VAT returning to 17.5 per cent from 1 January.

Overall retail prices rose annually by 2.3 per cent in January, but this was lower than expected and only up marginally on December's 2.2 per cent, the British Retail Consortium-Nielsen Shop Price Index found.

Stephen Robertson, the BRC's director general, said: "January's VAT increase was lost among a huge number of discounts and promotions. We would have expected non-food inflation to be higher because of the VAT rate reversal, but many shops held off passing the extra costs onto their customers."

In addition to hefty discounting and promotions, some of the UK's biggest retailers, from John Lewis to Majestic Wine, held back on reintroducing the 17.5 per cent of VAT. Tesco, Asda and Sainsbury's followed suit on many non-food lines.

Mr Robertson said: "Fierce competition, in the face of weakening consumer demand and uncertainty about the recovery, is keeping shop prices down."

The annual rate of non-food price inflation was 1.9 per cent in January, up by 0.5 per cent on the previous month. DIY, gardening and hardware retailers registered price increases, as did health and beauty chains, compared with December. But book, stationery and home entertainment retailers suffered 2.1 per cent price deflation.

Food price inflation was 2.9 per cent in January, but this was down from a rate of 3.7 per cent in December. This was the first time that food inflation had slowed since August. It is now only a third of last year's high, driven by a slowing of meat and milk prices.

A separate survey from Kantar Worldpanel (formerly TNS) revealed that Tesco's sales growth has overtaken rival Asda's for the first time in two years. For the 12 weeks to 24 January 2010, the market leader Tesco registered sales up by 5.5 per cent, compared with Asda's 4.3 per cent. Waitrose was again top dog, with sales up by 17.5 per cent, but Sainsbury's with 6.8 per cent growth and Morrisons' with 10.6 per cent also grew strongly.