Cost of living starts to fall

THE cost of living in Britain has dropped for the first time in two-and-a-half years offering a welcome boost to recession-hit consumers.

Shoppers can expect prices to fall even further soon Shoppers can expect prices to fall even further soon

In a rare bout of deflation, shoppers are now paying 0.1 per cent less on average for goods than in August last year, according to figures released yesterday.

Fierce discounts on clothes, shoes and electrical goods, combined with falling food inflation, has forced prices to sink and help ease the strain on family budgets. Experts say a short burst of shop price deflation is positive news for customers who can take advantage by stocking up on goods more cheaply.

Stephen Robertson, director general of the British Retail Consortium which released the figures, said: “Deflation has arrived. Overall, shop prices are cheaper than a year ago for the first time since February 2007.

“Falling prices are good news for customers and could give a much-needed boost to retail sales.”

The cost of vegetables, meat and other fresh food fell by 1.3 per cent in the sharpest monthly fall since records began in December 2005. Global falls in wholesale food and oil costs also helped pull average UK food prices down by 1.1 per cent between July and August.

And experts predict food will get even cheaper over the coming weeks.

Food prices were still 2.3 per cent more expensive last month than August 2008 but the inflation rate is very low compared with last summer when grocery costs rocketed by 10 per cent.

Meanwhile, the price of all shop goods, except food, dropped by 1.4 per cent last month on the previous year.

Bruce Fair, managing director of shopping website Kelkoo UK, said: “This price deflation is good news for shoppers, as they now have even more opportunity to get the best value for their money.”

Meanwhile, separate data suggests that the beleaguered UK economy could finally be pulling out of the doldrums.

Manufacturing enjoyed its strongest growth in more than three years in July thanks largely to the recovering car industry.

Figures from the Office for National Statistics showed the sector experienced a surprisingly good 0.9 per cent upturn in July.

City analysts welcomed the increase in output, claiming it proved that Britain’s economy had finally turned a corner.

Alan Clarke, economist at BNP Paribas, said: “It adds to the weight of evidence that suggests the recession is over.

“Manufacturing overreacted on the downside when growth was suffering around the turn of the year. We suspect production is now correcting that overshoot and could post some solid gains in the months ahead.”

The UK economy as a whole grew by 0.2 per cent in the three months to August, according to the National Institute of Economic and Social Research.

Consumers will see their money stretch even further over the coming weeks if lower wholesale costs and fierce competition between stores help to push the cost of living down even further.

Mike Watkins, senior retailer services manager at analysts Nielsen, predicted grocery bills could soon get even cheaper.

He said: “With retailers increasingly using price cuts as the prime promotion mechanic, we can expect further downward pressure on shop prices, especially in food, over the next few weeks.”

Retail experts say a temporary bout of deflation helps customers save money and can boost shop sales.

But economists take a dim view of deflation if it continues for any length of time. They warn that shoppers tend to stop spending on non-food goods in the hope that the price of furniture, electronic goods and clothes will get even cheaper.

This can create disastrous deflationary spiral where retailers are forced to offer big discounts to attract customers which put their businesses at risk. A prolonged consumer spending freeze can mean retailers, suppliers and manufacturers going under and the wider economy shrinking as production slows right down.

Tarlok Teji, head of retail at business consultants Deloitte, said cash-strapped customers were already driving prices down by opting for cheaper value lines.

He added: “That will have the effect of keeping prices quite low even though we have difficulties with the currency and that is increasing the cost of imports.”

Jason Gordon, retail director at Ernst & Young, predicted shop price inflation would hover around the zero mark in the coming months as heavy discounting, the strength of the pound and the planned VAT rise all take effect.

Commenting on the arrival of deflation in UK stores, he said: “Short term it is good news for consumers but if this is the start of a longer trend then that is not good news for anybody.”

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