For the first time since the cost of living crisis began nearly three years ago, shop prices in the UK have dropped, thanks to retailers offering discounts on clothing and household items to clear out unsold summer stock.
New data shows that prices fell by 0.3% in the first week of August compared to the same period last year. This contrasts with a 0.2% rise in July and a three-month average of 0%.
This marks the first instance of price deflation – where the cost of goods and services decreases – since October 2021.
The decline was largely driven by lower prices for non-food items, as retailers strategically discounted their products. Clothing and footwear saw some of the steepest discounts, with prices falling for the eighth straight month in August as demand weakened. Electronics also contributed to the deflation, with tech prices starting to come down after a few years of increases.
As shop prices dropped in August, the GBP/USD exchange rate pulled back, slipping below the 1.3200 mark on Monday, ending a seven-day winning streak that had seen the pair rise more than 3% from 1.2800 to a 29-month high of 1.3230.
While the drop in prices may offer a glimmer of hope to households struggling with the ongoing cost of living crunch, it’s only a small relief, as food prices continued to strain household budgets, rising by 2% in August. However, this was the slowest increase since November 2021.
Headline inflation for July reached 2.2%, above the Bank of England’s 2% target but below estimates. Bank of England Governor Andrew Bailey has warned that inflation could rise again by the end of the year, presenting potential risks. The likelihood of a BOE interest rate cut in September is estimated at just 30%, with a 50% chance of a rate cut later in the year. In contrast, a Fed rate cut in September is considered a certainty. Meanwhile, the sterling has gained 4.5% over the past 13 trading sessions, with only two days in the red.
This article was written in cooperation with TradingView