Robust UK retail sales numbers point to more monetary policy pain to come

This morning delivered another decent set of retail sales figures for the UK. Beating the expected monthly headline reading of 0.2%, the June print of 0.7% is the fifth time in the previous six months that retail sales have exceeded expectations and suggests overall consumption remains in rude health despite the onslaught of the monetary tightening delivered by the Bank of England (BoE) and the ongoing cost of living crisis. Although the big picture shows sales volumes remain below their pre-covid levels, this shortfall has now fallen to just 1%, the smallest gap since last September, and the overall 0.4% quarterly increase in Q2 recorded today is the first-time sales have posted two consecutive quarterly increases since Q3 2019. Looking forward, if this week’s CPI figures are indicative of inflationary pressures finally starting to turn lower, then the prospect of increasing real disposable incomes this implies suggests sales volumes have the potential to increase further throughout the remainder of the year.

Much of the strength behind today's numbers appears to have come from the unseasonably warm June weather experienced by the UK, encouraging consumers to head out into the shops and boosting department store sales and items such as furniture and food sales. Indeed, the only major category to see a reduction in spending was automotive fuels. But whatever is driving this spending, the figures suggest that UK consumers remain willing to spend money when the opportunity presents itself and this will be welcomed by the government as, in an economy where domestic consumption is responsible for approximately 60% of GDP, robust consumption will go a long way towards helping the economy avoid slipping into recession.

But today’s report will not have been so well received by the BoE, who will be concerned that the monetary tightening delivered to date is not dampening down domestic demand to the extent needed to bring CPI back to target. And it will do nothing to assuage concerns that the contiuned strong wages growth being seen, plaguing BoE policy, is directly fuelling this consumption, and, by implication, helping to keep CPI elevated. Indeed, if the current pace of wages growth remains constant then it is likely this will start to outpace price rises over H2 as the rate of food and core goods prices slows and household energy bills fall (the typical household’s energy bill will drop by 17% from this month as the energy price cap is lowered, boosting real incomes alone by 0.8%). The much-feared wages/price spiral risks rearing its head again and this fear, we suggest, will be sufficient to persuade the BoE of the need to deliver another 50bps rise in interest rates at its meeting next month.