‘The Governor of the Bank of England warned last week that product prices will begin to rise as we move from a period of no inflation to a period of ‘some inflation’. Although the latest CPI figures for September are fairly modest at one per cent, they nevertheless represent the fastest rise in two years, and we expect this trend to continue over the coming year. Indeed, some commentators are expecting inflation to surpass the Bank of England’s two per cent target next year, due in large part to the post-referendum decline in the value of the pound.
‘The recent public spat between Unilever and Tesco may have been a gift to the wags on Twitter, but it revealed the real tension that is at play between retailers trying to keep prices down for consumers and their suppliers who want the burden of higher costs to be shared.
‘The latest numbers show that food retailers, who are in fierce competition with each other, are still managing to protect their customers from the impact of currency movements. However, the same cannot be said for clothing retailers where prices have started to rise.
‘Dealing with currency instability is not a new challenge for retailers but the 18 per cent decline in the value of the pound since the referendum has nevertheless posed significant challenges – particularly in the clothing, furniture and electronics sectors who source much of their product from the Far East.
‘Clearly, many retailers have tried to anticipate the possibility of the devaluation of the pound, but much of the hedging runs out post-Christmas. While we have only seen modest price rises so far, it’s likely that most retailers won’t want to risk damaging their competitive position pre-Christmas and so quarter one next year is potentially when businesses will look around to see who breaks cover first.
‘Many retailers will be reviewing their supply chains and looking for suppliers who will be prepared to work with them to share increased costs. We may also see a greater demand for UK supply. Indeed, a recent survey by Barclays found that a third of retailers expect to source more from the UK, while almost half said they expect to source less from Europe. Other alternatives include sourcing direct from manufacturers and improving efficiencies in the supply chain.
‘However, for other retailers, the current weakness of the pound could prove to be a boon with the luxury sector in London set to be a particular beneficiary. Not only could the exchange rates attract a greater number of foreign tourists, the city is now the cheapest place in the world to buy a Louis Vuitton handbag.’