• This Christmas the price of products purchased online will be at their lowest levels since Q1 2011.

• Price inflation of an equivalent basket of goods in physical stores – measured by the In-Store Price Comparator Index – entered negative territory for the first time in five years, measuring annual inflation of -0.1%, for Q3 2014.

The Digital Price Index for Q3 2014, produced in conjunction with Talk Talk, shows that online price inflation has fallen for the third consecutive quarter for Q3 2014.

The biggest contributor to the fall in digital price inflation has been the appreciation of sterling against the euro increasing 7% over the past 12 months. This strengthening of the pound has reduced the cost of importing goods from the Eurozone to UK online retailers – allowing them to drop prices or keep them static. It also reduces the effective cost to UK consumers of buying goods from online retailers based in the Eurozone – allowing their money to go further than it did 12 months ago.
The latest data shows that in Q3 2014, annual inflation on the DPI fell by 2.3%, the largest drop on record. This was driven by the combined impact of a 1.1% decrease in prices at UK-based internet retailers an even bigger 6.3% fall in prices of products purchased from international based retailers.
The strengthening of the pound in recent months relative to the Euro – more than half of our household products are imported through the Eurozone – has resulted in a substantial drop in the price of goods sold by UK-based online retailers. The pound has also made significant advances against the Turkish Lira. The UK imports 6.4% of clothing and footwear from Turkey and has gained 11.8% against the currency in the past twelve months.
Meanwhile, annual inflation as estimated by the In-store Comparator Index has entered negative territory for the first time in five years, registering -0.1% growth in the past twelve months. Despite falling prices in physical stores, the 2.1% gap between online and in-store price inflation remains double the five year average.
The research indicates that annual inflation in stores has now outpaced inflation on the internet 19 quarters in a row. Figure 1 illustrates the levels of inflation based on the Digital Price Index (DPI) and In-store Price Comparator (see figure below).