UK retail sales surge shows consumers resilience, lifting sterling

UK retail sales spiked higher on the back of inflationary pressures and increased sales volumes in August, official figures revealed on Wednesday.

Retail sales volumes increased 1% month-on-month in August, much higher than the 0.2% consensus forecast and an improvement on the 0.7% revised figure from a month earlier.

Compared to last year, retail sales were 2.8% higher versus expectation of a 1.4% rise and up from 1.7% in the prior month, the Office for National Statistics said.

The contribution of food stores remains flat year-on-year and there was a fall in the contribution of growth from petrol stations, which the ONS said showed most of the overall growth came from non-essential items.

Store prices increased across all store types, with non-food store prices up 3.2% on last year from 2.7% the month before, while non-store prices rose 3.3%, both their highest year-on-year price growth since March 1992.

“Within this month’s retail sales we are seeing strong price increases across all store types compared with a year ago, reflecting wider inflationary pressures," said senior ONS statistician Kate Davies.

"However, we are still seeing underlying growth in sales volumes, and with strong growth in non-essential purchases as consumers continued to buy more from non-food stores.”

MARKET REACTION AND ANALYSIS

The pound spiked up against the dollar to 1.36 immediately after the ONS data as the robust sales data was seen as increasing the odds that the Bank of England will raise interest rates in November, though the currency eased off soon after.

Rachel Lund, head of retail insight & analytics at the British Retail Consortium, said August’s bout of autumnal weather put a spring in the step of seasonal purchases of winter wardrobes and home furnishings.

"The strength of today’s figure will add to the growing expectation of an earlier interest rate rise. However, retail sales figures are notoriously volatile and with a number of factors making reliable seasonal adjustment nigh on impossible, the health of consumer spending should be assessed with caution," she said, pointing to pressures on consumers’ budgets remain and high levels of lending.

"Moreover, a no-deal outcome in trade negotiations with the EU could leave consumers facing price increases of up to 30 per cent on some products, which will do substantial damage to growth in sales volumes."

Currency analyst Ranko Berich at Monex Europe said the perception that the UK consumer has shrugged off falling real wages went a long way to explaining the hawkish turn we’ve seen at the Bank of England recently.

“Last week’s MPC minutes noted that members believe the outlook for consumption to be better than previously expected, and today’s data certainly support that conclusion. Sterling is up slightly following the news, and fixed income markets are reflecting very high expectations for a rate hike as early as November.

“The question now for the pound is rapidly becoming 'what could possibly go wrong?'.”

However, economist Sam Tombs at Pantheon Macroeconomics said that the outlook for retail sales over the remainder of 2017 still looks challenging due to inflation and wage growth, noting that the largest net balance since November 1990 of general retailers planning to raise prices over the next three months, according to the EC's August survey.

"In addition, the recent decline in timely indicators of housing market activity suggests that household goods retailers will struggle toward the end of 2017," Tombs said, leading him to expect growth in retail sales volumes to disappoint over the coming months, encouraging the MPC to hold back from raising rates this year.

"Note that September’s data will be published two weeks before the MPC’s November 2 meeting, so today’s data are not the final word."

KPMG UK's chief economist, Yael Selfin, said that consumers’ mood still remained subdued amid the continued squeeze on households, with uncertainties around the Brexit process possibly contributing, though the retail data "points to a relatively resilient consumer at this stage".

"This could support a slight pick-up in consumer spending in the third quarter following the disappointing Q2 results.”