British Retail Inflation at 16-Year High

Bad news for Britain's shops: The price of goods rose at its fastest rate since 1992 as sales fell for a second consecutive month

A lethal combination of rising prices and falling sales has hit Britain's shops, according to the latest evidence from business leaders on the state of retailing.

Activity in the high street fell for a second consecutive month in May, according to the Confederation of British Industry, while retailers put up their prices at the fastest rate since 1992. Retail confidence and the employment outlook have also worsened slightly this month, the CBI Distributive Trades Survey revealed.

When asked about their year-on-year sales volumes, only 28 per cent of retailers said they had increased and 42 per cent said they had fallen. The resulting balance of minus 14 per cent is less severe than the minus 26 per cent reported last month.

Sales are expected to recover slightly next month, by a balance of 6 per cent.

More worryingly, prices of goods rose at their fastest rate in 16 years in the year to May, as shops passed on the extra costs of energy, food and raw materials. A positive balance of 56 per cent of companies said their average selling prices had gone up, the highest figure since May 1992.

A similar rate of price increases—a balance of 52 per cent—is expected next month. Food retailers, including the major supermarkets, had a good month, with a positive balance of 51 per cent reporting year-on-year growth. Clothing sales stabilised, while footwear and leather outlets enjoyed another successful month.

However, the number of people visiting high street shops in May was down 1.5 per cent on last year's total, according to the latest Retail Footfall Index from the research group Experian.

Ian McCafferty, the CBI's chief economic adviser, said: "It is encouraging that retailers can see some recovery in sales next month, but they are not optimistic about the business outlook and retail conditions are likely to remain tough."

The combination of stagnating sales co-existing with rising inflation—so-called "stagflation"—is a product of the unprecedented convergence of a credit crunch and a commodities crunch, which has squeezed profits and household incomes.

Earlier this month, the Bank of England warned that living standards would rise only very slowly over the next few years. Falls in consumer confidence and house prices confirm the outlook for the economy as a whole remains gloomy.

The conflicting data make the dilemma facing the Bank of England's Monetary Policy Committee, which will make its next decision on interest rates on Thursday, even more acute.

Michael Saunders, an analyst at Citi European Economics, said: "These readings, and the plunge in house prices, highlight the deteriorating prospects for the economy, but there are also signs that the inflation overshoot will be bigger and more protracted than the MPC has been expecting.

"The MPC has warned that an extended period of sub-trend growth is probably needed to bring inflation back to target. Very tough times lie ahead."

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