Next and Morrisons predict end to Brexit-related price increases

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Two of the biggest retailers in Britain have indicated some respite for cash-strapped consumers by predicting that Brexit-related price increases would come to an end in 2018.

Next, a clothing retailer and Morrisons, a supermarket chain, have both issued upbeat forecasts stating that the impact of the weaker pound in pushing inflation higher should start to lessen early next year.

Next had informed customers earlier that its prices would increase on average by approximately 5% this year, as the drop in the value of the pound since the EU referendum made imported goods and services more expensive.

On Thursday, the chief executive of the fashion chain, Simon Wolfson, said that price increases would be about 4% in 2017, before easing in 2018.

“Next year price inflation looks set to work its way out of the system as the effects of the one-off Brexit devaluation of the pound begin to annualise,” said Wolfson. “Assuming no further movement in the value of sterling, in the first half of 2018 we expect price rises of no more than 2% and no price rises at all in the second half of 2018.”

Morrisons stated that the effect of higher inflation caused by a weaker pound would begin to unwind by the end of its current financial year in February 2018.

Consumer budgets have been under heightened pressure in recent months as prices rise increases faster than wages. Inflation rose from 2.6% in July to 2.9% in August, driven higher by the increased cost of importing clothes, food, and fuel.

The retailers made the remarks after reporting results for the first half of this year. Shares in Next increased by 11.5% in early trading, making it the FTSE 100’s biggest riser after it boosted sales and profit guidance for the full year.

The retailer stated that while sales had declined by 2.2% and pre-tax profit decreased by 9.5% in 2017’s first six months, the outlook for trading had grown.

Lord Wolfson stated: “The first half of the year has been difficult and sales and profits are in line with our cautious expectations. However, our performance in the last three months has been encouraging on a number of fronts and whilst the retail environment remains tough, our prospects going forward appear somewhat less challenging than they did six months ago.

“As a result, we are taking the opportunity to modestly upgrade our sales and profit guidance for the full year.”

The supermarket reported greater sales and profits for the first half of this year, as it continues a turnaround programme under David Potts, its chief executive.

Potts stated that “a new Morrisons is beginning to take shape,” as like-for-like sales – stripping out sales at shops open for less than one year – grew by 3%. Pre-tax profit leaped by 40% to £200m.

“More solid results from Morrisons confirms the turnaround strategy under Dave Potts is bearing fruit,” said Neil Wilson, an analyst at ETX Capital. “The supermarket is in the middle of a turnaround that is producing results, although there is always work to do in this intensely competitive sector.”

Morrisons shares dropped by more than 4%, despite the increase in sales and profit.