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UK inflation falls again, can retailers and consumers feel more confident?

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UK inflation has slowed for the second month running – to 3.9% in November – reaching its lowest level since September 2021.

The latest figures from the Office for National Statistics (ONS) have shown inflation decreasing much more than expected. Economists had previously forecast a fall to 4.4%, following October’s drop to 4.6%.

Lower fuel rates, a drop in food prices and the cost of household goods coming down was credited for the latest figures.

Grant Fitzner, ONS chief economist, explained: “Inflation eased again to its lowest annual rate for over two years, but prices remain substantially above what they were before the invasion of Ukraine.

“The biggest driver for this month’s fall was a decrease in fuel prices after an increase at the same time last year. Food prices also pulled down inflation, as they rose much more slowly than this time last year.

“There was also a price drop for a range of household goods and the cost of secondhand cars.”

The latest ONS data has been met by mixed reactions from industry experts. Customer loyalty platform Airtime Rewards welcomed the news.

“As inflation continues to edge downwards, consumers will start to feel more confident in their ability to spend in the lead up to Christmas. This is welcome news for retailers too, who will be delighted to get more customers through the doors who may be willing to part ways with their cash,” noted Josh Graham, co-founder and chief marketing officer at Airtime Rewards.

“Looking ahead to 2024, brand loyalty will be more important than ever before as businesses strive to attract and retain consumers who are otherwise inclined to hunker down as the cost of living crisis continues to bite.”

However, Kevin Bright, global leader of the consumer pricing practice at McKinsey & Company warned that the drop in inflation did not mean the “economic challangers” were over.

He said: “Whilst price rises are easing and even declining in some areas, consumers are unlikely to see a like-for-like reduction in their wallets over the holidays – as many will be contending with the energy price cap increase, higher cost of consumer credit and sky-high re-mortgage rates as the base interest rate holds at a 15-year high.

“Many consumer-packaged goods companies are yet to see their margins return to pre-inflation levels, with most still operating with margins that are 2-3% below 2021 levels. These companies will look to recover this margin compression over time – but with there being a high level of “pricing fatigue” amongst retailers and consumers, these companies are looking to adjust promotion investments, reduce discounting, and shift to a more profitable product mix to rebuild margins.

“The winners will be those who avoid the temptation to retrench, instead using this time of turbulence to make bold moves. Our research shows that companies which successfully invest in right-to-win adjacent and breakout businesses are delivering total shareholder returns growth that is 12 percentage points higher than their sub-industry peers.”

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