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In my earlier blog this month I accepted a challenge from Vicki one of our senior financial controllers to predict what would happen with the increase in VAT. Vicki thought retailers would generally absorb the increase, whilst I thought that retailers would take the opportunity to increase prices.

To settle matters we undertook a very unscientific test. We each picked three items from the John Lewis website on the 22nd December and agreed to compare prices one month later.

The results are:

 So all of Vicki’s choices (the bottom three above) did indeed stay the same price and all of my choices actually came down in price. In fact our shopper would save nearly £200 purchasing all of the items in January rather than before Christmas.

On reflection perhaps this was predictable and there are many more factors at work here rather than just VAT for example exchange rates, the introduction of newer models, competition and January incentives to push what is usually a slower month.

This was of course a completely unscientific exercise and the sample too narrow, too small and all from one retailer but perhaps the most telling item above was the lowly John Lewis tablecloth. Surely of all the items selected this was the one least effected by external factors – it’s pretty much a commodity item, its own branded so no price comparison available and was probably stocked some time ago so less likely to effected by changing exchange rates. The price of this item did not move, John Lewis chose to absorb the VAT increase.

I am still a bit surprised by the result, as I have mentioned earlier anecdotally my clients have been talking about large recent increases in raw materials and we have all seen the huge increase in fuel costs of late. However it is a much more complex picture out there than perhaps at first glance, few people are likely to complain or gossip about the reduction in prices of some items and yet most of us are vocal if prices go up.

Perhaps we should revisit these items over the next few months to see what happens.

Mike O’connell, CEO, Isosceles Finance

I had a bet with Vicki, one of my financial controllers, just before Christmas.

Vicki suggested that the increase in VAT rates would have little effect on consumers since she believed that retailers would absorb the increase into the margin and not pass on the full effect of the increase.

I disagreed with Vicki, I believed that retailers had dropped margins as much as they were able to throughout the last couple of years. With the increases in basic raw materials also starting to really hit home I believed that retailers would, in general, pass on the increase to consumers.

So Vicki and I decided to have a bet with each other, we each chose three items from John Lewis and benchmarked the price before Christmas. We agreed to look at the prices after a few weeks into the New Year.

We each tried to be clever, I chose commodity-like items vacuum cleaner, a laptop and a TV – items where margins would already have been squeezed through competitive forces. Vicki went for smaller items where the retailer was likely to want to keep a price at a milestone price point such as £9.99.

So who was the winner? We will see at the end of this week with the big reveal.

Mike O’connell, CEO, Isosceles Finance