Key Takeaways
- With 97% of shoppers having at least one, loyalty cards have been a big marketing success for UK supermarkets.
- They are not accounted for in UK price measures however, which means inflation may have been overstated in the past. At the same time, consumer spending may have been understated.
- Data suggested UK food sales fell in December but when considering both loyalty and seasonal discounts, this may not have been the case.
- New methodologies should ease this problem but when growth is weak and inflation relatively low, potential inaccuracies in data do matter.
- Increases in employer National Insurance means that the UK is facing strong upwards pressure in inflation. The labour market is weakening however, so rate cuts will likely be delayed and not entirely prevented.
Loyalty cards have been a big marketing success for UK supermarkets. 97% of shoppers have at least one and they offer big discounts on selected goods. But the way the Office for National Statistics (ONS) measures prices means that they have overstated inflation and understated growth, making stagflation look worse. At least that’s my view. Before going any further, I should say that I raised this issue with the ONS a year ago and they agree that there’s a problem with their methodology but reckon the effect is ‘not material’. But there is recent evidence to support my view.
The ONS ignores loyalty card discounts on the basis that they are not ‘open to all consumers’. That may have been reasonable when loyalty cards were a small share of the market but that’s no longer the case. A recent report by the Competition and Markets Authority gives some big numbers. They reckon loyalty card discounts are between 17 and 25% and apply to one fifth of all grocery bills. This suggests supermarket prices for food and beverages are being overstated by 4%. The volume of sales is calculated by removing the effect of prices so it would be understated by the same amount. Taking account of market share, the weight of food and beverages and so forth, suggests that the CPI is overstated by 0.3 percentage points. With the volume of consumer spending understated by a smaller amount.
These numbers are not huge. In terms of inflation, it’s the increase that matters and the big changes were in 2023. So why am I raising this now? I was struck by the reported fall of 0.5% in the volume of food sales in December with prices up by a similar amount. I received a voucher from my supermarket offering a 10% discount if I did my big Christmas shop there. That’s in addition to the loyalty discounts. So it may be that food sales did not fall in December and that prices were actually weaker. These effects should unwind when data for this month are published. Now I’m not attacking the ONS and they do a great job with limited resources. They are about to change their methodology to scan actual bills which should remove this problem and bring other advantages. But I don’t think they will revise the past and when growth is tiny and inflation relatively low, these issues do matter.
The bigger picture is that the UK faces strong upward pressure on inflation over the next 3 months from wage costs because of increases in National Insurance. The labour market is weakening and the boost to inflation should be temporary so this would delay but not prevent Bank of England rate cuts. We shall see.
