Retailers absorb impact of rise in VAT – for now

Retailers have absorbed at least some of the impact of the VAT rise on prices, according to the British Retail Consortium – though such action cannot last indefinitely, it warns, and inflation is still accelerating.

The news comes as the Bank of England's Monetary Policy Committee meets to discuss its next move on interest rates. Persistently high and rising inflation is putting additional pressure on the committee to act to "gain credibility" among the markets and consumers.

Overall, the annual rate of shop price inflation accelerated from 2.1 per cent to 2.5 per cent between December and January, with food inflation up from 4per cent to 4.6 per cent and non-food items going up by 1.3 per cent, against 1.1 per cent.

The extent to which the rise in global commodity prices – especially oil and food – is being fed through to to the high street is of crucial importance to the Bank, though notoriously difficult to judge. The Bank has estimated the rise in CPI inflation from the beginning of 2010 to the end of this year as between a half a percentage point and 1.5 percentage points. The Office for National Statistics' s next bulletin on consumer prices is published next Tuesday, and may provide additional information on the impact of the VAT rise at that point.

Stephen Robertson, the British Retail Consortium's director general, warned however that the willingness and ability of retailers to absorb rises in taxes and world commodity prices is finite. "The VAT rise had little effect on shop prices in January. Poor Christmas trading left retailers with stock to shift. The impact of the increase was almost entirely lost among the unusually high number of post-Christmas discounts and promotions," he said. "The rate of inflation for non-food goods – mainly the ones subject to VAT – was only 0.2 percentage points higher after the VAT rise than before, showing retailers generally took the hit on behalf of customers. But, with a range of other cost pressures also squeezing margins, retailers will struggle to go on absorbing it."

Echoing the official national statistics data and the UN Food and Agriculture Organisation indices, the retail consortium said that food inflation had now reached its highest level since June 2009 – a 19-month high.It was driven by a sharp rise in the rate of fresh produce food inflation, which reached 6.3 per cent, the highest since April 2009. In world terms, the food price spike is thus as severe as in 2008, driven up by freakish weather conditions, burgeoning demand from emerging markets and a recovering Western economy.

Mervyn King, Governor of the Bank, has warned that prices on the CPI measure of inflation will rise at an annual rate of 4-5 per cent this year. He has hinted that inflation will not return to the 2 per cent official target until much later in 2012.

The BRC says that further upward pressure on food prices could come from the US, the world's biggest wheat exporter, where it is feared that the recent cold snap will put further pressure on supply.