Photographer: Luke MacGregor/Bloomberg

U.K. Retail-Sales Jump Doesn't Dispel Concern About Consumers

  • Volumes rose 1.4% in February, led by household goods, clothes
  • Sales still heading for first calendar-quarter drop since 2013

U.K. retailers enjoyed a better February than economists expected, but that hasn’t been enough to dispel concern about the outlook for consumers as inflation accelerates.

While sales rose 1.4 percent from January, beating the 0.4 percent median forecast, underlying figures show volumes are falling at the fastest pace in seven years. As the weaker pound pushes up import costs, that will leave households further squeezed by higher food and fuel prices, bad news for an economy that relies heavily on domestic demand.

The rapid acceleration in inflation -- which is seen reaching 3 percent later this year -- is largely due to the pound’s sharp drop since the Britain’s June vote to leave the European Union. Speaking on Thursday, Bank of England Deputy Governor Ben Broadbent said that while exporters were in a “sweet spot” because of the weaker currency, there would be a hit on consumers and that the negatives from the pound will “marginally outweigh” the positives.

The February retail data from the Office for National Statistics showed that sales fell 1.4 percent in the past three months, the most since early 2010. Sales will decline this quarter unless March sees an unprecedented 3.3 percent gain. They haven’t declined in a calendar quarter in more than three years.

“We interpret this as evidence that the spike in inflation is really starting to bite,” said James Smith, an economist at ING in London. With Brexit uncertainty affecting hiring and wages, “we’d expect that to continue to weigh on spending and overall U.K. economic growth this year.”

The data came a day after IHS Markit said households are more pessimistic about their financial prospects than at any time since 2013 and the BOE warned of a further slowdown in sales. Retailer Next Plc, which has raised clothing prices by about 4 percent, warned Thursday of a tough year ahead.

Consumers have in part financed their spending by saving less and borrowing more, taking advantage of falling borrowing costs. They may be unwilling to keep doing so at a time of heightened uncertainty as Britain begins the process of exiting the EU.

For some, the risks to household spending from inflation are overstated. Kallum Pickering, an economist at Berenberg who expects inflation to average 2.7 percent this year, said that “growth is entrenched, unemployment low and households feel confident.”

“By increasing borrowing and saving less to target a desired level of consumption, households can smooth spending over the medium-term to compensate for the modest squeezes,” he said. The outlook for inflation “is not enough to spoil the party.”

— With assistance by Lucy Meakin, Andrew Atkinson, Mark Evans, Harumi Ichikura, and Linly Lin

    Before it's here, it's on the Bloomberg Terminal.