By Daniel Hunter

Overall shop prices showed annual deflation for the 16th consecutive month in August, according to the BRC-Nielsen Shop Price Index (SPI).

The index reported annual deflation of 1.6% from 1.9% in July, decelerating but remaining deeper than the twelve month average rate of 1.2%.

The deceleration in the overall SPI figure has broken the four month declining trend. Food inflation has remained at a record low of 0.3% in August, while non-food deflation decelerated to 2.9% from 3.3% in July.

The prices of the majority of the agricultural commodities that we follow closely fell over the second half of 2014, with the main exception being cattle, coffee and cocoa. The growing demand for chocolate comes as prices for cocoa, its main ingredient, are at a three-year high due to high demand around the world.

Sugar prices, meanwhile, have remained subdued due to bumper crops in producing countries. Prices for corn, soybeans and wheat on the Chicago Board of Trade, the global benchmark, slid in recent weeks to the lowest levels since 2010 as U.S. crops developed in good condition and outlook improved for harvests in Russia and Ukraine.

Dairy prices in the FAO’s index declined 4.4 per cent from June, falling for a fifth month, reflecting both reduced import demand and abundant export availability. The dramatic drop in cotton prices has coincided with upgraded harvest forecasts for the US, the world’s biggest exporter of cotton bales. Uncertainty over cotton policies in China, the largest cotton producer and consumer, has also depressed prices. Oil prices fell marginally in the second quarter of the year. The global outlook for rising commodity prices remains modest.

Helen Dickinson, British Retail Consortium Director General, said: “Shop prices reported deflation of 1.6 per cent in August and marked sixteen consecutive months of falling shop prices for consumers. Clearly retailers are continuing to help drive down the overall inflation rate (Consumer Price Index).

“The summer months saw retailers provide plenty of attractive offers on fresh food goods which saw their lowest level of inflation this year, with vegetables, fish and also milk, cheese and eggs contributing to the downward pressure. Big-ticket goods that we tend to associate with the summer, gardening, electricals, DIY, furniture and floorcovering, helped to sustain low prices.

“What’s more, as the UK economy continues to pick up, the benefits of subdued cost increases - oil and commodity prices remained relatively flat over the first half of the year — incurred by retailers will be passed on to customers.

“While the Bank of England’s recent estimates suggest that retailers margins are still below pre-crisis levels, retailers will take heart from an outlook for costs that is broadly encouraging.

“Meanwhile the industry will keep building the solid foundations for growth in consumer spending”.

Mike Watkins, Head of Retailer and Business Insight, Nielsen, said: “Many non-food retailers will have looked to keep prices stable as end of season ranges sell through, and for supermarkets there was an opportunity to capitalise on the improved summer weather by keeping prices low, to tempt shoppers to spend a little more on food and drink. With the trading environment still challenging, all retailers will now be keen to keep prices as competitive as possible to encourage consumers back into store after the summer holidays“.