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UK inflation forces shoppers to cut back and switch to cheaper brands

Consumers migrate to discount supermarkets as the Bank of England warns that CPI inflation could hit 5% this autumn

Britain’s hard-pressed consumers are trading down to cheaper brands and making fewer visits to the supermarket as higher inflation erodes their spending power.

With the Bank of England warning on Tuesday that the annual increase in the cost of living could hit 5% over the coming months, the market research company Kantar Worldpanel said shoppers were buying less and migrating to low-cost retailers such as Aldi and Lidl.

One of the UK’s “big four” supermarket chains, Asda, said the number of visits by shoppers had fallen by 1.2% in the three months to June, adding that customers were economising on petrol costs.

Figures from the Office for National Statistics on Tuesday showed an intensification of the squeeze on living standards, with inflation as measured by the consumer price index rising from 4.2% to 4.4% – double the rate of annual earnings growth.

Meanwhile, the energy company Npower became the latest utility company to announce price increases well in excess of the current inflation rate when it said tariffs for its 3.3 million customers would be going up on 1 October.

Average tariffs for gas will increase by 15.7% and electricity by 7.2% from 1 October, Npower said, meaning the average monthly direct debit dual-fuel customer will see bills increase by 12.2% – an additional £134 a year.

The fourth largest provider in the UK said the increases were necessary because of rising wholesale prices on the global market and the need to invest in Britain’s future energy supplies.

Sir Mervyn King, the governor of the Bank of England, said higher energy bills would force CPI inflation to “around 5%” this autumn but held out the prospect of the cost of living falling next year.

In his latest quarterly letter to George Osborne explaining why inflation remained more than one percentage point above the government’s 2% target, King blamed dearer imports, higher VAT and rising global commodity prices.

The ONS said last month’s pickup in inflation had been due in part to higher bank charges and to smaller falls in clothing and footwear and household goods prices than in July 2010. Many high street retailers brought forward their summer sales to June this year in an attempt to boost demand, resulting in fewer bargains last month.

Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, said the modest pickup was “really the calm before the storm”. He added: “We’re likely to see inflation rise significantly over the next couple of months as the large energy price hikes begin to kick in.”

Kerry McCarthy, the shadow Treasury minister, said: “It is very worrying that inflation is more than double the government’s target rate and rising. Rising world commodity prices are partly to blame. But things have been made much worse in Britain by George Osborne’s big rise in VAT, which is due to his decision last year to cut the deficit too far and too fast.”

In its breakdown of the grocery market, Kantar Worldpanel said sales values were 3.8% higher in the 12 weeks to 7 August than they had been during the same period of 2010, but food inflation was 5.2% during the same period.

“It is evident that shoppers are trying to manage their ‘personal’ inflation by trading down. This can be done by seeking out lower priced outlets and cheaper alternative products,” Kantar said, noting that Aldi had posted annual sales growth of 24.4% and achieved its best-ever market share of 3.6%. “It’s unsurprising that the discounters have pushed further ahead this month.”

In his letter King said turbulence on global stock markets and the debt crisis in the eurozone were of “particular concern”.

“Several member countries face substantial challenges in ensuring the sustainability of their fiscal positions and preserving the stability of their banking systems. There is a risk that this could lead to further severe stress and dislocation in financial markets and, were this risk to crystallise, it would have a significant impact on the UK economy.” © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds