Lower mortgage costs pushed the RPI rate down in February, but the Consumer Prices Index (CPI) inflation rate rose from 3 per cent to 3.2 per cent for the month, partly as a result of food price rises.
Vegetable prices were the biggest contributor and prices of fruit, soft drinks, bread, cereals and meat all rose. Games, toys, and computer games also recorded increases.
Despite the CPI rise and the fact that the RPI did not fall into negative territory as some experts had expected, observers fear retailers will almost certainly have to contend with deflation soon.
Bank of England Governor Mervyn King had to write to the Chancellor explaining why CPI inflation remained above target, observing that much of the inflation “appears to be concentrated in components where a large share of goods is imported”. He expected February’s rise to be temporary.
Capital Economics UK economist Vicky Redwood said clothing deflation had eased from -10 per cent to -9.3 per cent but is convinced deflation will remain on the agenda.
She believed the increase in CPI would be short-lived and would “reach negative territory by the autumn” as spare capacity in the economy exerts downward pressure on inflation.
She warned: “Weak demand will force retailers to absorb most of the rise in import costs into their margins, while rising unemployment will bear down on wages growth.”
Pali International analyst Nick Bubb agreed. “Deflation is now a big risk,” he said.
Increased supply costs for retailers could prove critical if deflation forces retailers to take on costs themselves, Bubb added.
He said: “The big unknown is whether retailers will be able to pass on the Far Eastern sourcing increases in the autumn. If not the outlook for them is not so good.”
Redwood said the inflation figures did not change “our view that there is a significant danger of a broad and long-lasting bout of falling prices”.
Deflation would be bad news for retailers because consumers could delay purchases in the hope of ever lower prices, while the shift in demand would pile greater pressure on businesses.