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Retailers passed on more costs of VAT than in 2010


January’s VAT rise added an estimated 0.76 percentage points to the Consumer Price Index (CPI), according to figures released by the Office for National Statistics (ONS) today.

This is almost double the 0.4 per cent effect on the CPI 12-month rate seen after the VAT increase from 15 per cent to 17.5 per cent in January 2010, leading the ONS to claim retailers passed more costs onto the consumers this time around.

Major retailers and representative groups such as the British Retail Consortium (BRC) have previously argued that consumers were being protected from the effects of VAT and that overall inflation was primarily being caused by rises in global commodity prices.

Darren Morgan, ONS Statistician, said: “Households experienced prices rising between a December and January for the first time, according to the CPI.

“Our figures show that without the increase in VAT, prices would have fallen by 0.7 percentage points.

“It seems that retailers passed through a greater share of the VAT rise to households this year.”

Last week the BRC announced that its Shop Price Indexmeasurement was 2.4 per cent for March and that its low level was due to retailers protecting consumers from price increases.

CPI figures for March, also released today, show that general inflation fell from 4.4 per cent in February to four per cent last month.

Food & non-alcoholic beverage prices fell 1.4 per cent and were the biggest pressure on the CPI dropping, which is good news for grocery shoppers as budgets continue to be squeezed.

There was further bad news for the homewares sector however with furniture & household goods seeing the biggest rise in prices of 1.7 per cent, following news from the BRC today that furniture sales were some of the hardest hit during a miserable March for retailers.

Neil Saunders, Consulting Director of Verdict Research, said: “That inflation headed downward in March will be welcome news to retailers and consumers, many of whom had feared it would touch 5 per cent.

“However, there is little cause for celebration as the inflation rate remains well above average and continues to exert significant pressure on household disposable income and discretionary spend.”

The Retail Price Index, which includes mortgages and other housing costs, decreased from 5.5 per cent to 5.3 per cent between February and March.

At the beginning of May the Monetary Policy Committee will decide again whether to keep interest rates at their historic low of 0.5 per cent, and some had feared that higher inflation would have forced its hand to raise the rate.

Vicky Redwood, Senior UK Economist for Capital Economics, argues that the fall in the CPI should ensure that interest rates remain unchanged, for now.

Redwood added: “March’s drop in both inflation and consumer spending clearly relieves some of the pressure on the Monetary Policy Committee (MPC) to raise interest rates soon.

“Although inflation is probably set to resume its upward trend later this year, we still expect it to fall sharply in 2012.”

Published on Tuesday 12 April by Editorial Assistant

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