Report by KPMG/Synovate predicts prices will keep going up.
Prices on the high street will continue to rise next year, even after the VAT hike on 1 January, according to research by the KPMG/ Synovate Retail Think Tank.
The report said that most retailers would only pass half of the 2.5% rise in VAT to their customers – absorbing the rest themselves.
However, retailers will then attempt to make up the shortfall through price rises later on in the year. This will have the effect of pushing inflation up faster than expected.
The report also said that households will find their finances stretched by spiralling prices of essential goods such as clothes and shoes.
Last week, the governor of the Bank of England, Mervyn King, had to write another letter to chancellor George Osborne to explain why the Bank’s 2% target for inflation, as measured by the consumer prices index, was missed for the eight consecutive month. Inflation in July was 3.1% and the Bank has predicted it will not fall to the target level until the end of 2011.
Inflation, coupled with low wage growth and public sector cuts, will have a detrimental effect on public spending.
The RTT report said: “Fiscal policy such as tax rises, welfare cuts and the public sector pay freeze and job cuts, coupled with a premature rise in interest rates, will certainly seriously stall any prospect of recovery in the retail sector in 2011.”