VAT shock yet to be passed to consumers

Julian Harris
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INFLATION in UK shops rose to 2.5 per cent in January – from 2.1 per cent in December -- despite retailers absorbing much of the hike in VAT, a comprehensive survey revealed today.

Even more price pressure could spill through to consumers in the coming months, the British Retail Consortium warned.

“Retailers generally took the VAT hit on behalf of customers,” said the BRC’s Stephen Robertson.

“But with a range of other cost pressures squeezing margins, retailers will struggle to go on absorbing it.”

The annualised rate of inflation for non-food goods was up by just a fifth of a per cent, to 1.3 per cent.

The bulk of the rise was due to spiking food prices, which increased 4.6 per cent compared to January 2010 – the sharpest rise for 19 months.

“The rise in food inflation is being driven by surging food commodities in global markets,” the report said.

“On the demand side, the growth in consumption from emerging economies continues to push prices higher -- in particular, economic growth in China, India and Brazil.”

In China, food inflation topped 10 per cent in November to push consumer price inflation to 5.1 per cent.

And yesterday the Chinese central bank responded to inflationary pressures by increasing interest rates by a quarter-point to 6.06 per cent, its second increase in just over a month.

“The January CPI must have hit a fresh high,” speculated Shenzhen-based economist Xu Biao.

In the UK, many observers expect the Bank of England to follow suit and increase rates. Fixed mortgages rates rose to a six month high, Moneyfacts revealed yesterday, as lenders price in an expected increase in the Bank rate.