Retailers face a tough trading climate in the next few years, according to Credit Suisse First Boston equity analyst Tony Shiret. Although there have been signs of improving margins, the retail sector could be in for a further bout of price deflation.
Shiret said there is a real risk that fundamental problems in the US economy will lead to a marked weakening of the dollar, which in turn would lower import prices and lead to further price deflation.
The lesson of the recent past is that the stock markets fear the effect of deflation on retailers' businesses.
Shiret added: 'Price deflation has been the biggest single influence on retailers' profitability over the past five years.
As inflation has become deflation, retailers' share price performance has declined.'