U.K. Shoppers’ Sunny Summer Won’t Change Gloomy Consumer Outlook

  • Sales including fuel rose 0.6% in June, beating forecasts
  • Average store prices increase adding to inflation concerns

A summer boost for U.K. retailers probably won’t be enough to persuade a majority of Bank of England officials that an immediate rate increase is warranted.

While June’s heat wave helped lift sales 0.6 percent -- more than economists forecast -- the Office for National Statistics said volumes in the first half were still “relatively flat.” The hottest temperatures since 1976 bolstered clothing purchases, offsetting drops in food and fuel. Much of the pickup was driven by rebounds in household goods and non-store sales, following declines in May.

Since the data tend to be volatile and the ONS attributed much of the growth to sweltering temperatures, the outlook remains key for the BOE’s Monetary Policy Committee as it judges whether to lift interest rates from a record low. That decision hinges on the evolution of consumer spending, with Thursday’s figures also showing average store prices excluding fuel rose by 2.5 percent in the year through June.

“I doubt that the middle ground on the MPC is going to get more hawkish on the back of sales of paddling pools and flip flops,” said Alan Clarke, an economist at Scotiabank in London. “The main story for the economy during 2017 has been and will continue to be weak consumer spending.”

Investors’ expectations for an interest-rate increase this year, based on short-sterling trades, were unchanged at about 40 percent after Thursday’s data. The pound extended losses.

Household budgets are under strain as inflation outpaces wage gains and the Institute for Fiscal Studies said Wednesday that living standards aren’t likely to improve anytime soon. That pressure was visible in the retail figures, with food sales falling 0.5 percent. Real pay growth will probably continue to fall, with some economists predicting inflation will rise to 3 percent by the end of this year.

While a minority on the BOE’s rate-setting committee called for a rate increase last month to help contain price gains, the minutes of the meeting said “the persistence of weaker consumption” was also a key factor. Officials are due to publish new economic forecasts alongside their next rate decision on Aug. 3 and will weigh this retail sales data alongside fresh inflation figures and the first estimate of second-quarter gross domestic product, due on July 26.

The pound’s slump since the U.K. voted to leave the European Union means officials are likely to face a trade-off between lackluster growth and inflation exceeding their 2 percent target for some time.

“The rebound leaves retail spending volumes broadly flat in the first half, consistent with stagnant real incomes,” said Allan Monks, an economist at JPMorgan & Co. in London. “The currency is likely to continue pushing up on retail prices for a while, which makes it hard to see a strong or sustained recovery in spending in the near future.”

— With assistance by Andrew Atkinson, Scott Hamilton, Harumi Ichikura, and Mark Evans

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