Supermarkets shrink products to cut costs

Supermarkets are planning to shrink products and use cheaper ingredients in an attempt to avoid raising prices post-referendum.

Since the Brexit vote, the pound has fallen and is now worth 10% less than before, meaning British companies have to pay more for imports. But following a lengthy price war, supermarkets are more reluctant than ever to charge customers more.

In a new report, the Bank of England says that some will have to pass their higher costs on to customers all the same.

"There was little evidence of pass‑through to retail pricing as yet, but there were signs that would begin over the coming months, with the extent of the depreciation helping persuade some retailers of the need for higher prices," the authors say.

Others, though, are trying to solve the problem by cutting back on either the size or the quality of their products.

"Retailers were very cautious about any increases in prices, given that consumers remained highly price sensitive, and so the extent and timing of pass‑through would largely depend on competitors' actions, particularly in food retail," reads the report.

"Some food retailers were re‑engineering products to maintain existing prices."

Even without the increased costs from the devalued pound, though, manufacturers have been shrinking products to avoid putting up the price. Earlier this year, Which? found that Andrex toilet rolls had become 8% smaller, for example, without any drop in price.

Meanwhile, McVitie's Digestives dark chocolate biscuits shrank by 10% - but the price in Tesco actually went up from £1.59 to £1.69.

"Shrinking products can be a sneaky way of increasing prices. We want manufacturers and supermarkets to be upfront so consumers aren't misled," Which? editor Richard Headland said.

This morning, the Office for National Statistics said that the Brexit vote hasn't yet had a major impact on the economy overall.

"It hasn't fallen at the first fence but longer-term effects remain to be seen," said chief economist Joe Grice.

Meanwhile, the OECD has revised its forecast for the UK this year up from 1.7% to 1.8% - but warned that harder times are to come. It has halved its forecast for next year to 1% - the biggest downgrade for any major advanced economy.