Retail prices set to rise by an average 5% to 8% in 2017, think tank predicts

Retail prices will increase by an average of 5% to 8% over the course of 2017, with the question remaining over how much will be passed on to consumers, a think tank has suggested.

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The KPMG/Ipsos Retail Think Tank (RTT) has predicted that retail growth will stagnate overall next year as a result of political uncertainty fuelled by Brexit, events in Europe and a new US president.

With UK consumer price inflation set to rise to 2.5% to 3% next year, any growth in non-discretionary retail - including food and grocery - will be offset by a decline in discretionary spending, resulting in overall retail growth of 0.5% in the year, the report said.

The RTT noted that until now UK shoppers remained "pretty relaxed" about the results of the Brexit referendum, with consumer spending on the rise over the final months of 2016.

"However, this may change as Brexit negotiations, and the changing political landscape across Europe, crystallise," the report said.

RTT co-chairman and KPMG's UK head of retail, Paul Martin, said: "You could argue that the 'Great British' consumer has broadly ignored the result of the Brexit referendum, with consumer spending continuing to grow over the final months of the year.

"This is very likely to change in 2017 and the sector will face much stronger headwinds.

"We will see inflation rise, potentially up to 3% by the end of the year. In conjunction with continued FX rate fluctuations, prices will rise.

"The question remains how much will be absorbed within the supplier base, by retailers and actually be passed on to the consumer.

"A conservative view at the moment is that this will amount to 5-8% price increases over the course of the year, understandably varying across categories."

Maureen Hinton, from Verdict Retail, said: "Retail expenditure will be stronger in 2017 than in 2016, but not because of increased consumer demand but because of price inflation.

"The higher price of imported goods following the EU referendum, and the fall in the UK pound, has been masked by currency hedging in 2016, but this starts to unravel in Q2 2017 and all retailers, struggling with cost inflation and squeezed margins, will be forced into passing on price rises to the consumer."

Members listed their top concerns as rising consumer price inflation, increased costs to retailers, diminishing consumer and business confidence and political uncertainty.

The RTT said retailers were likely to focus on increased customer engagement as it becomes increasingly difficult to compete on price.