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Retailers absorb VAT rise in January

Published: 9 February 2011
Non-food inflation up by 0.2% as British Retail Consortium warns against a rates rise which could hamper recovery.
Retailers absorb VAT rise in January
Overall shop price inflation rose to 2.5% in January from 2.1% in December, according to the latest BRC-Nielsen Shop Price Index.

Food inflation accelerated to 4.6% from 4% the month before, while non-food inflation crept up 0.2% to 1.3%.

BRC director general Stephen Robertson said the VAT rise had "little effect" on shop prices last month as the impact was lost among an usually high number of discounts and promotions, after poor Christmas trading left retailers with stock to shift.

He added: "The rate of inflation for non-food goods - mainly the ones subject to VAT - was only 0.2% higher after the VAT rise than before, showing retailers generally took the hit on behalf of customers. But, with a range of other cost pressures also squeezing margins, retailers will struggle to go on absorbing it."

Food inflation is now up to its highest for a year and a half, due to rising commodity prices.

The BRC has also warned the Bank of England that an interest rate rise now would damage the country's fragile economic recovery, while doing little to tackle inflation.

Ahead of its latest interest rate decision tomorrow, the organisation is urging the Bank to hold its nerve and make no change.

The BRC warns that a rise in interest rates would hit consumer spending at a time when households are already under "immense pressure" from rising taxes and public spending cuts. A recent BRC-Nielsen consumer confidence survey showed 27% of people say they have no spare cash - a record high.

Mr Robertson said: "Rising rates at a time when consumer confidence is weak, the housing market is slowing and lending hasn't revived would only undermine a very uncertain recovery... Inflation is not coming from the high street where competition is containing shop prices. The economy needs all the support it can get, especially in the light of negative GDP figures. Raising rates prematurely will hamper the recovery and damage retailers' ability to invest, grow and create jobs."

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