UK inflation has fallen for the third consecutive month, with clothing prices easing on the prior month, but analysts warn many businesses may need to maintain higher prices to combat profit loss.

The latest figures from the Office of National Statistics (ONS) show UK inflation eased to 10.1% in the 12 months through January 2023, from 10.5% a month earlier. The Consumer Price Index had peaked at 11.1% in October.

The data shows clothing and footwear prices were down 3.2% in January against a decline of 2.9% in the year prior, and in the 12 months through to January were up 6.2% against an increase of 6.5% in December 2022.

“While inflation eased for the third month in a row, households are still being squeezed by high prices,” said Helen Dickinson, chief executive of the British Retail Consortium (BRC). “The cost of food remains elevated, with the ripple effect from the war in Ukraine pushing up the price of food due to the knock-on increases from high fertiliser and energy prices. So as Christmas discounts faded away, households will have felt the pressure in their weekly grocery shop.

“Despite this, consumers were offered some relief, as the prices of petrol and diesel fell. In addition, clothing and footwear inflation eased as retailers offered bigger discounts in the January sales. Retailers remain committed to doing everything they can to keep the price of essentials low for consumers, expanding value ranges and offering discounts for vulnerable groups.”

Pippa Stevens, apparel analyst for GlobalData, believes that while the drop in inflation will have a slight positive impact on consumer sentiment, it is unlikely to massively change how consumers are currently spending since it is still close to the highest level in 40 years.

“The cumulative impact also means that prices will still have risen significantly faster than most consumers’ wages, reducing discretionary incomes. 

“Though the UK apparel market is expected to have seen a small increase year-on-year in January due to Omicron making consumers feel more cautious about visiting shops in the prior year, spend is then forecast to drop as people become more hesitant to dip into their savings and prioritise essential sectors.”

Benoit Soucaret, chief experience officer at Merkle UK, believes there is power in communication. He says retailers need to be honest with their customers, and if they can’t give lower prices across the board, they need to offer alternatives such as discounts and useful loyalty programmes.

“Although inflation has fallen, retailers are being left with no other option than to increase prices as the cost of doing business soars. While this is out of retailers’ control, they can take back their power by ensuring communication with their customers at every opportunity. Transparency is the ultimate currency for loyalty now as consumers are much more selective with what they spend their money on.

“It is no longer about what they want, it’s about what they need. Everything else becomes secondary. Retailers need to be honest with their customers about price rises and offer alternatives such as discounts and useful loyalty programmes. Non-essential retailers have fewer opportunities to stand out and leave a long-lasting positive impression with consumers, and it’s crucial that audiences are put first amid tougher times. Right now, retailers that play the long game will ultimately have the best chance at success.”

Walid Koudmani, chief market analyst at online investment platform XTB.com, commented: “Today’s UK CPI inflation data was followed by a sharp pullback in the pound as it added to the potential of a more dovish BoE as investors carefully follow any developments which may indicate the future steps of the central banks policy. GBPUSD pair retreated below 1.21 and is attempting to recover from this area while the UK stock index failed to gain any significant momentum as the situation continues to be quite uncertain. Any further hints of a fall in inflation could be used by the Bank of England to justify a change in approach and have a significant impact on markets moving forward.”

Research published last week by economics consultancy Retail Economics suggests rising costs will plague 2023 retail sales with UK inflation adding almost GBP260bn (US$316bn) across international markets.

The Ecommerce Delivery Benchmark Report 2023 found that 80% of retailers were planning to increase the price of products, with 40% suggesting rising costs will be the biggest challenge this year.

By Just Style