Do falling prices herald a retail spending spree?

That the ONS has today reported the first deflation in 50 years is not unexpected news. Falling oil and farm gate prices, as well as an intense price war between the leading grocers, have all been widely reported and greatly welcomed by shoppers who are finally starting to see small rises in their disposable incomes.

But do falling prices herald the start of a spending spree and better times for the UK’s retailers?

For high street retailers we see at least some reasons to be positive. Crucially, the falling prices reported by the ONS today are happening in tandem with increases in average wages. This means, for the first time in some years, most shoppers find themselves with more money in their purses to spend. While some shoppers will choose to spend this extra cash on holidays or going out, much is anticipated to be spent with high street retailers, with clothing set to benefit in particular. Higher-ticket items like electricals and furniture also stand to benefit as more confident shoppers feel increasingly willing to take on a little additional debt.

For the supermarkets, however, the outlook is not so optimistic. While basic economics tells us that falling food prices should stimulate demand, that looks unlikely to be the case here. The downturn, and subsequent need for households to cut back spending, opened many shoppers’ eyes to the amount of money they had previously been wasting on food. Ultimately there is only so much food one can eat and through more careful planning, shopping around and using leftovers, shoppers have been able to reduce the amount that they buy without having to compromise. Few shoppers show signs of returning to bad wasteful habits. In fact most shoppers tell us they are actually looking for further ways to reduce food waste.

So lower prices or not, food volumes look unlikely to grow significantly over the next couple of years. Yet, of some concern, most of the leading grocery players have outlined growth strategies that involve driving volumes. The law of averages tells us that not all can succeed in winning this zero-sum game. Of course protection and development of market share are key in grocery, but we would like to see further industry emphasis on adding value in the shape of clearer differentiation between retailers, innovation and by providing shoppers with real reasons to trade up.

While there will undoubtedly be retailer winners and losers, the clear winner here is of course the shopper. Food and fuel are major areas of expenditure for shoppers, so falling prices in these areas make a big difference. While economists worry about the potential problems caused by deflation (that shoppers may hold back spending in anticipation of falling prices), you’d struggle to find a shopper sharing such concerns!