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Inflation is back and you might have to make tough decisions on the weekly shop

Tim Wallace
Cinema ticket sales typically do well when times are tough as a trip to see a movie - such as Dunkirk - is an affordable treat - Warner Bros. Pictures

Toblerone and Marmite fans had early warnings of the squeeze on wallets. The distinctive chocolate has gone up in price, but it has gone down in number of chunks. And the brief disappearance of Britain’s favourite yeast extract from Tesco shelves last year was a clear signal of pressure on supermarkets to charge more.

The squeeze on spending continues. Many Britons returning from summer holidays will find their wallets distinctly lighter than they expected. Economists expect inflation to get worse for consumers before it gets better. Prices rose by 2.6pc in the past year and inflation is set to rise to more than 3pc by the end of the year, the fastest rate since 2012. At the same time wages are struggling to grow.

For clues on what that might mean for different types of household, your favourite products or your employer, it helps to look back to the previous surge in inflation. In 2008 and again in 2011 price rises peaked at 5.2pc, double the current annual rate of inflation.

Much of that was caused by a fall in the pound in the financial crisis, making imports more expensive. Turmoil in global markets also pushed prices higher, particularly as oil traded at more than $100 per barrel.

Back then food prices really were shooting through the roof. At the peak in August 2008 food prices were storming up 13.8pc on the year, far ahead of the peak rate of 9.1pc in the previous price surge in 1990. Basic foodstuffs were among the worst affected – the cost of breads and cereals soared 17.4pc. By comparison, food prices in the past year have risen by only 2.3pc.

Nonetheless, this comes after a period of deflation – food prices fell by between 2pc and 3pc per year from late 2014 to late 2016 – so it is still an uncomfortable pinch, and one which is likely to intensify.

Back in 2008 and 2011 this forced households to make tough decisions on what they should buy. “Spending on big ticket items fell by the wayside – for example if your washing machine is looking a bit old and tired it is pretty easy to delay replacing it for a few months,” says Toby Clarke, a consumer analyst at Mintel. “Instead people focused on stuff that can maintain their day to day lifestyle.”

Items including shampoo also struggled to sell, he says, as households held off purchasing soaps until a special offer appeared.

The impact also varies across different households. Lower income families typically spend a larger proportion of their incomes on food than richer households, and have less cash to spend on expensive items. The Office for National Statistics studies the different inflation rates at different income levels, and found that in recent history prices have gone up fastest for those on low incomes.

From 2003 to 2013, which encompasses two periods of high inflation, the ONS found the bottom 10pc of households by expenditure felt an average inflation rate of 3.7pc, while the highest spending 10pc had a rate of 2.3pc.

“The least affluent households spend 17pc of their expenditure on food compared to an average of 11pc, so [higher food inflation] has a significant effect,” says Richard Lim, chief executive at Retail Economics.

Businesses were affected too by the 2008 and 2011 surges in inflation, which reshaped the retail landscape – higher food prices led to the rise of the discounters as shoppers changed their supermarkets entirely. Lidl and Aldi, supermarkets offering lower prices, took the market by storm. In the years before the financial crisis Aldi was not even in the top 10 supermarkets by market share. Now Aldi has 7pc of the market and Lidl 5.1pc making them the fifth and eighth biggest, respectively. The bigger supermarkets have responded by cutting prices and introducing new lower-cost ranges of basics such as fruit and veg. But a renewed squeeze could help the newcomers.

“There is definitely an opportunity for them to significantly grow, even to potentially double [their market penetration] in the next few years,” says Paul Martin, KPMG’s head of retail.

German discount chains have had a big impact in the UK as shoppers look for a better deal Credit: Alamy

This renewed pressure on the big supermarkets is not coming in isolation. “There are a lot of different pressures – it is almost a perfect storm,” says Martin, noting the rise of internet shopping plus extra costs including the national living wage.

Other sectors which might have a tougher time are those which have spent the past decade slashing costs already, leaving them with little fat to trim. Some industries fashionable now barely existed when the financial crisis struck, such as the online film, TV and music streaming services.

“If you had a one-off subscription 10 years ago, to a magazine for example, they became the first victims in the ‘nice to have’ bucket,” says Martin, indicating the same might happen to the online services now.

A lucky few industries typically weather inflationary storms rather better, however. The fashion industry is obsessed with the so-called “lipstick effect” – the idea that sales of small treats rise in tough economic times.

Beauty products did indeed sell particularly well through the aftermath of the financial crisis and the sterling-led rise in prices. One other product which appeared to follow that path was the premium ready meal which offers two servings for £10, including a bottle of wine, a deal which flourished after the financial crisis.

Leonard Lauder, left, is said to have been the first to draw widespread attention to rising sales of affordable treats such as lipstick in times of economic strife Credit: Roy Letkey

“People cut back on going out for dinner but still wanted a nice Friday night meal,” says Clarke.

The same was true of the rise of prosecco. Shoppers with something to celebrate might not want to splash out on champagne, but by buying prosecco they could save money.

“Cinemas tend to do well in slowdowns, it is an affordable night out and you can control the cost because you know how much it will cost before you get to the cinema,” says Clarke. Indeed spending on films has been growing strongly of late. An analysis of data from Barclaycard indicates spending on film and event tickets in July was up 24pc on the year.

Away from feel-good purchases, the ultimate impact of rising prices depends on an array of factors. Most notable is that slippery economic variable, confidence. Companies are still hiring which should encourage households to spend, but house prices are wobbling. Mintel’s surveys indicate that 59pc of people are worried about food prices going up, making this far and away their biggest concern.

It is those in the middle, typically with families to support, who are most worried. Of those, the lower earners are already feeling the pinch, says Clarke: “People who are on £15,000 to £20,000 are already stretched so if food prices start increasing then that puts them firmly in the danger zone.”