The final quarter of the calendar year is the key trading period for the majority of UK retailers. The trends that emerged during Q4 2006 are ones that will influence all retailers in 2007.

Shoppers spent an extra £2.9bn in Q4 2006, 37.9% of the total annual growth in the sector (£7.7bn), demonstrating how important this quarter was in driving growth for the year. Inflation is returning to the market. In Q4 2005 volume drove growth, but for the first time in six years there was no deflation in Q4 2006.

Food & grocery prices were the main influence on inflation, but there is strong evidence of consumers trading up to higher price points across other sectors too as they become inured to low prices. An online facility is essential. We estimate that consumers used the Internet to order an extra £1bn worth of products in Q4 2006, a 40% increase on 2005. Growth in 2007 will produce an extra £4bn through online shopping and retailers who ignore this channel do so at their peril.