After month-to-month inflation for groceries of 2.5% in the first month of the nationwide lockdown, grocery prices have declined through the summer. By the first week of August, the price level for groceries was around just 0.5% higher than it was at the beginning of the year. This is according to new research from the IFS, funded by the Nuffield Foundation and the Economic and Social Research Council.
Using real-time data on millions of grocery transactions (covering food, drink, toiletries, cleaning products and pet food) up until 9 August, the analysis shows the following:
- The initial surge in inflation occurred much more in full-line supermarkets (Tesco, Sainsbury’s, etc.), where promotion levels were cut back, than in discounter supermarkets (Lidl, Aldi, etc.).
- There was gradual deflation through the summer as price promotions returned to normal levels.
- There was a 70% increase in the share of groceries bought online for the four weeks up to 9 August 2020 compared with the same period in 2019.
- An initial 8% reduction in the range of grocery products bought, which occurred in March, has persisted, suggesting an ongoing reduction in consumer choice.
A 15% fall in the frequency of promotions at the beginning of lockdown was followed by a gradual return to normal levels. This change in promotion activity accounts for more than half of the inflationary spike at the beginning of lockdown and most of the subsequent recovery in prices. By the beginning of August, promotions that entail price discounts (for example, ‘20% off’) had returned to pre-pandemic levels. In contrast, quantity promotions (for example, ‘buy two for £2’) remain depressed.
The pattern of a large spike in inflation at the beginning of lockdown, followed by gradual deflation afterwards, occurred in large store formats, small store formats and groceries bought online. It is, however, considerably more pronounced for the set of full-line supermarkets than for discounter supermarkets or convenience stores. In addition, it is exhibited across all nine broad grocery product types.
Since the beginning of lockdown in March, there has been a substantial increase in online grocery shopping. In the first month of lockdown, the share of grocery spending online was 20% higher than for the same period in 2019. By the beginning of August, the increase compared with 2019 was nearly 70%.
A decline of 8% in the first week of lockdown in the number of unique products purchased by households in supermarkets, food and drink retailers, and convenience stores has persisted since lockdown. This indicates that the set of products available to consumers shrank, even though most shops in this sector of the economy remained open.
The inflationary spike during the first month of lockdown was experienced by households across the income distribution, but was bigger for better-off households. However, the gap in inflation experience across different income levels has since closed.
Martin O’Connell, Deputy Research Director at IFS and an author of the research, said: ‘The sharp increase in the price of groceries at the start of lockdown was largely reversed by the beginning of August. This was driven by retailers cutting back on promotions at the onset of lockdown, and then the prevalence of price, though not quantity, promotions gradually returning to normal levels. As cases of COVID-19 are now rising and restrictions reintroduced, it remains to be seen whether another bout of grocery inflation will follow.’
