Shop price inflation fell to 1.4% in January, from 1.7% the previous month, dropping to its lowest rate since March 2010, according to the BRC-Nielsen Shop Price Index.
Food inflation dropped to 3.7% - its lowest rate since July 2010 - and non-food inflation stayed flat in January.
Clothing, furniture and electricals were all cheaper than 12 months ago. The price of electrical goods fell at its fastest rate for three years, deflating 4.9% in January from 4.3% in December. Flooring and furniture reported annual deflation for the first time since May 2011, down by 0.3% in January from 0.1% in December.
Continued promotions and price cuts at supermarkets helped drive food inflation down but activity remains “subdued” as consumers look for discount bargains rather than multibuys. Ambient food was the biggest downwards driver, slowing to 4.7% in January from 5.9% in December.
Easing shop inflation is due, in part, to the January 2011 VAT rise to 20% falling out of comparisons, however slowing commodity markets and freight costs have also contributed.
BRC director general Stephen Robertson said: “These figures show how retailers are holding down prices for customers despite a range of upward pressures. Even though retailers are facing higher transport and property costs, overall non-food prices are exactly the same as a year ago.”
As easing commodity prices work their way through the supply chain, food inflation is expected to drop further but the BRC said Europe’s embargo on Iranian oil imports is “a major concern” to this movement, as it could lead to inflation volatility.
Robertson hopes inflation falls will contribute to consumer confidence, following the recent four point uptick in consumer sentiment revealed by the GfK Consumer Confidence index in January.
He added: “For there to be any significant improvement in retailers’ fortunes in the coming year it’s essential that people feel better about their personal finances and become more willing to spend.”