UK shop prices fall less sharply as retailers brace for tax hit

By Ben Ezeamalu

LONDON (Reuters) - Prices in British shops fell less in March than in February and are likely to climb soon due to the impact of a new tax on employers and other costs for retailers, an industry group said on Tuesday.

The British Retail Consortium said shop prices fell by 0.4% in the 12 months to March compared with a bigger 0.7% annual drop in February and less than the average 0.6% yearly price decline over the previous three months.

BRC Chief Executive Helen Dickinson said the introduction on April 6 of higher social security contributions for employers - which were announced in finance minister Rachel Reeves' first budget in October - would combine with other increased costs for businesses to raise prices.

"With retailers bracing for significant extra costs which kick in later this week as a result of the budget, inflation will likely accelerate in the coming months," Dickinson said.

The Bank of England is trying to assess whether the higher tax burden for employers will increase the risk of persistently high inflation pressure. Last month it warned against assuming that it was on a preset path for interest rate cuts.

Food prices rose by 2.4% compared with March last year. Alcoholic and non-alcoholic beverages saw price increases due to changes to duties and high global sugar prices, the BRC said.

By contrast, clothing and footwear showed double-digit deflation as a result of weak consumer demand.

Britain's headline rate of inflation slowed to 2.8% in February after hitting a 10-month high of 3.0% in January but the BoE expects it will reach around 3.75% later this year.

Mike Watkins, head of retailer and business insight at NielsenIQ, which publishes the data with the BRC, said retailers were using seasonal sales promotions to pull in reluctant shoppers.

"However, with upwards pressure on prices, retailers may also need some focused price cuts to help footfall in the run up to the late Easter," Watkins said.

(Reporting by Ben Ezeamalu; Editing by William Schomberg and David Milliken)