The return to the old rate of VAT on 1 January had little effect on shop prices as businesses sought to offset the extra cost by offering customers discounts.
The latest British Retail Consortium (BRC) shop price index found that prices rose by 2.3 per cent in January, up by just 0.1 per cent from the December mark.
Along with significant discounting, some of the larger retailers also held back on passing on the extra 2.5 per cent in VAT.
Stephen Robertson, the BRC's director general, said: "January's VAT increase was lost among a huge number of discounts and promotions. We would have expected non-food inflation to be higher because of the VAT rate reversal, but many shops held off passing the extra costs onto their customers.
"Fierce competition, in the face of weakening consumer demand and uncertainty about the recovery, is keeping shop prices down."
Date:3 February 2010
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