UK July retail sales print softer, but will not dissuade BoE from hiking rates again in September

Today’s retail sales figures from the UK painted a somewhat gloomy picture of consumer activity in July. The headline figures showed sales down on the month by -1.2% and on the year by -3.2%. The soft monthly reading was the first negative print since March and has largely undone the positive readings seen over the preceding quarter. Understandably the numbers have seen questions raised over whether consumer spending activity is finally starting to buckle under the weight of the interest rate rises delivered by the Bank of England (BoE) and the heavy tax rises imposed by the UK government: sterling is trading on a softer footing while expectations for next month’s Monetary Policy Committee meeting have seen expectations for a 50bps interest rate rise marked down a little. Privately the BoE will be welcoming today’s numbers as it attempts to engineer a slowdown in economic activity in order to rein in still strong inflationary pressures.

However, it is too early to conclude with any certainty that consumption, and by implication aggregate demand, is starting to weaken, and July’s decline in sales is most likely nothing more than a reaction to the poor weather seen over the month. From being some 2.7 degrees Celsius above their 52-year average, average temperatures fell to 0.2 degrees below average, while rainfall across the UK as a whole was 78% higher than the average figure over the same period. Certainly this will have discouraged consumers from venturing out into shops and retail centres and is likely the primary factor behind the 2.6%/1.7% monthly drop seen in food/non-food store sales. Indeed, it is only a 2.8% monthly increase in online sales – likely due to Amazon’s Prime Day – that prevented the drop in overall sales being larger.

Given the above, it is therefore difficult to conclude wth any certainty that consumer spending is on a weakening path, and over H2 spending should actually see a positive boost as real household disposable incomes begin to rise. Monthly wage increases look set to outpace price rises over Q3 and Q4, while any drag to spending from higher mortgage rates will be mostly offset at an aggregate level by the rising deposit interest being earned on savings accounts as interest rates rise. Of course, some households will choose to save more, reflecting the increasing opportunity cost of dis-saving and as an insurance against growing uneconomic uncertainty, particularly with regards to the labour market. But overall, expectations are for consumer spending to remain robust going forward.

All in all, this week has presented the BoE with a somewhat confusing set of data. The mix of strong wages data, stubborn core CPI but weak retail sales numbers today, does not make next month’s monetary policy decision any easier. But it is the CPI numbers that ultimately drive monetary policy decisions and while today’s spending figures are disappointing, there are enough good reasons for the BoE to look through them and continue to focus on its main concerns of too-strong wages growth and entrenched inflationary pressures that have permeated into all corners of the economy. Accordingly, today’s numbers are unlikely to materially affect September’s interest rate decision.