Market News

(Bloomberg) -- UK retailers are discounting heavily to lure shoppers amid weakening consumer confidence, underscoring the risks facing the sector as it braces for higher costs linked to the conflict in the Middle East.

Overall shop price inflation slowed to 1% year-on-year in April, the British Retail Consortium said Tuesday. Food prices rose 3.1% from a year earlier, compared with a 3.4% increase in March. Non-food prices by contrast fell 0.1%, returning to negative territory after growth of 0.1% in the year to March.

“With weakening consumer confidence, retailers competed harder on price to stimulate more spring spending,” BRC Chief Executive Officer Helen Dickinson said. “While we’re yet to see the full force of the Middle East conflict feeding into consumer prices, it will not be long before it begins to.”

Several retailers including fashion and homeware company Next Plc and grocer J Sainsbury Plc have warned about the fallout from the war in Iran, which has upended energy and shipping markets. That threatens to make imports more expensive at a time companies are already grappling with higher wages and UK taxes, posing a dilemma over whether to absorb or pass on costs to customers.

Though the conflict is already spurring inflation in the UK, the impact has been largely limited to energy and motor fuel. Retailers are bracing for impact from higher fertilizer and commodity prices, and the UK’s Food and Drink Federation now expects food inflation to exceed 9% by the end of the year.

“Increased fuel prices are already leading to higher inflation,” said Mike Watkins, head of retailer and business insight at NIQ, which compiled the data for the BRC. “We can expect a similar impact in the food and non-food supply chains in the months to come.”

Prior to the war, overall UK inflation had been on track to fall to the Bank of England’s 2% target in the second quarter, clearing the way for further interest-rate cuts. Now, however, it’s expected to stay at around 3% and accelerate in the third quarter, raising the possibility of rate increases instead.

Meanwhile data from Worldpanel by Numerator showed like-for-like grocery inflation fell to 3.8% in the four weeks to April 19, the lowest level in a year, as shoppers sought out discounts. Spending on promoted items rose 7.8% from a year earlier, compared with a 0.2% drop in spending on full-priced goods.