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Groceries are getting more expensive: Here's why

(Images: AAP)

The fierce discounting between the Australian supermarket giants is cooling off as the market becomes "more rational" and starts focusing on profit.

UBS' latest grocery price tracker report showed Woolworths prices decreasing just 0.4 per cent in the quarter ending June. This compared to 0.9 per cent in the prior quarter.

If looking at just "dry" groceries (items that are not fresh), the price deflation went from 1.5 per cent in the March quarter to 0.8 per cent in the June period.

Coles' price deflation also slowed, according to UBS, although a year-to-year comparison was not provided as the retailer was still synchronising offline and online prices this time last year.

The discounting is cooling off so much industry-wide that the report even predicted this year the sector could return to price inflation for the first time in a while.

UBS stated this "more focussed, profitable investment being made in price" is good news for the viability of the sector, giving it a positive outlook for potential shareholders.

"We remain positive on grocery and see scope for sentiment to become more positive in 2019 as further signs of inflation are evident. We remain positive on Woolworths and Metcash [owner of IGA], and less negative on Coles following our recent UBS Supplier Survey and pricing study."

As well as the decrease in discounting, a slowing in Aldi's growth in national market share was cited as a positive for Woolworths, Coles and IGA.

The "depth" of promotional discounting also fell for Woolworths, going from 31 per cent of products in the March quarter to 22 percent in the June quarter.

"Falling breadth is consistent with retailer commentary for 'fewer but more impactful' promotions," the report said.

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