Falling food price inflation and heavy discounting by retailers helped to mitigate the impact of January’s VAT increase, according to the British Retail Consortium (BRC).

While the price of food rose at an annual 2.9% last month, this was down from the 3.7% increase recorded in December.

Overall shop price inflation climbed by 2.3% in January, but this was lower than anticipated, the BRC-Nielsen Shop Price Index found.

The standard rate of VAT reverted to 17.5% on 1 January 2010 following a thirteen-month reduction to 15%. Many retailers responded by cutting prices in an effort to offset the tax rise and boost post-Christmas sales.

Commenting on the data, the BRC's director general, Stephen Robertson, 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.’

He added: ‘Fierce competition, in the face of weakening consumer demand and uncertainty about the recovery, is keeping shop prices down.’