A number of inflationary pressures will mean the cost of retail goods in the UK will continue to rise in this forthcoming year.
Today VAT is rising to 20 per cent of the value of goods, and shoppers are likely to see the majority of consumer items increase in price as a consequence.
Of the major retailers that Retail Gazette has spoken to, none have outlined plans to absorb the full amount of the tax increase but a number of different strategies have been outlined to reduce the affect on customers.
Tesco and The Co-operative both confirmed that prices will be introduced gradually and that some big ticket and electrical goods will stay at pre-VAT rise prices for most of January to encourage spending.
Asda will continue its price-match guarantee and wants to confirm to its customers that on-shelf prices will be up to date as of today, whilst Superdrug has possibly made the biggest commitment by investing £3 million in absorbing the cost of the rise.
Despite these efforts, a report by online shopping comparison site Kelkoo and the Centre for Retail Research predicts that £2 billion in sales will be lost in the first quarter of 2011 due to the change in tax.
Yesterday the Labour Party leader Ed Miliband criticised the tax change and estimated that it will cost families £7.50 a week but some believe that it is just the tip of the iceberg when it comes to price increases set for this forthcoming year.
Jonathan De Mello, Head at Retail Consultancy at commercial property and real estate advisers CB Richard Ellis, argues that VAT rises tend to offer a two-month boost to sales before their introduction and an equally negative impact for two months afterwards.
Of bigger concern, De Mello claims, will be the steadily increasing cost of commodities which have kept overall inflation consistently above the coalition government’s target.
“In 2011 we expect inflation to stay above the Bank of England’s two per cent target, clearly as its well above that now,” he told Retail Gazette.
“Unless the government raises interest rates, which I think it will have to at some point, it is going to be very hard to keep inflation anywhere near that target. It’s not going to get below three per cent let alone two per cent.
“I think the target needs to be revised. All the cost pressures, VAT rising at the start of the year, import prices increasing and rising fuel cost will keep inflation above that target.”
Retail prices have been rising dramatically over the last few months, with the price of clothing increasing by 11.3 per cent year-on-year in November according to the Office for National Statistics.
This was the highest growth in clothes inflation since records began 30 years ago and most fashion retailers will be using the VAT rise as an excuse to push prices up even further.
De Mello added: “Cotton price increases will have the biggest impact on retail, as clothing represents half of a shopping centre’s turnover. In the typical high street clothing is the highest driver of footfall.
“Prices have risen by about 17.5 per cent across many categories of clothing over the last few months, particularly driven by the Chinese cotton crop being quite poor but also the weak pound meaning it’s much more expensive to buy goods from abroad.”
The price of wheat also spiked during the summer due to failed crops across the globe and a promising if slight fall in food inflation last month (according to the British Retail Consortium) is not likely to be maintained in the new year as supermarket promotions end.
Price comparison website Gocompare.com produced research last week that claimed that seven out of ten Britons are reconsidering big purchases over the next few months because of the VAT rise.
With tight margins and rising inflation likely push prices up even further over the next few months, retailers will have to work hard to keep consumer spending at healthy levels.