High UK inflation hits sales, confidence and activity

High UK inflation hits sales, confidence and activity

Data released on Friday showed that high inflation in the UK is hitting retail sales, business activity and consumer confidence, bolstering forecasts of an economic recession this year.

Britain’s retail sales volume fell for the second consecutive month in June as high inflation caused consumers to tighten their belts.

A closely watched survey showed business activity slowed in July to its weakest pace since the Covid pandemic lockdown in early 2021 as high inflation hit demand.

Additionally, research firm GfK revealed that UK consumer confidence remained at minus 41 in July, the lowest since records began in 1974.

The data underscored the impact of soaring inflation – which hit a 40-year high of 9.4% in June – on household finances and business activity.

Joe Staton, director of client strategy at GfK, said confidence was “severely depressed this month as the impact of soaring food and fuel prices and rising interest rates continues to darken the financial mood of the nation”.

The amount of goods bought in Britain fell 0.1% from the previous month – the second consecutive fall – but consumers spent 1.3% more than in May due to higher prices. prices, according to data from the Office for National Statistics.

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Previously, retail sales volume and value growth were similar, but since February the difference between the two has been more than 1 percentage point, as inflation has reduced what people can buy with their money.

Recorded purchases have been declining or stalled since October last year, with sales growth volumes being revised down in recent months. Figures do not include spending on bars and restaurants.

Heather Bovill, ONS deputy director for surveys and economic indicators, said the retail sales trend “is down”.

Food sales rose 3.1% due to the Queen’s Jubilee celebrations in early June — the only sector to register an increase. In contrast, sales of fuel, clothing and household goods fell sharply, with retailers suggesting consumers were cutting back on spending due to higher prices.

It comes as an ONS survey, published on Friday, found half the population said they bought less food in the first half of July due to soaring prices.

The survey found that nearly half of the population struggled to pay their energy bills and more than one in five people had to borrow money or take out credit in the past month compared to last year.

The hit to households was reflected in the monthly S&P Global/CIPS Purchasing Managers Survey which showed the Flash Composite Production Index fell to 52.8 in July from 53.7 in June and the lowest since February 2021.

Purchasing Managers Index line chart, below 50 = a majority of companies signaling a contract indicating a slowdown in UK business activity in July

Chris Williamson, chief economist at S&P Global Market Intelligence, said: “UK economic growth slowed in July.” He added that forward-looking indicators suggested “the worst is yet to come”.

Manufacturers’ order books deteriorated for the first time in a year and a half. Production was held back by capacity constraints due to equipment and personnel shortages.

Line chart of the index showing UK consumer confidence at an all time high

However, the survey also showed some easing of pressure on input costs. Paul Dales, an economist at Capital Economics, predicted that inflation would lead to a 3% drop in real household disposable income this year and another 2% drop next year. “As a result, a recession now seems inevitable,” he said.

Despite faltering demand and early signs of falling costs, James Smith, an economist at ING, expects the Bank of England to hike rates by 50 basis points at its August meeting, after five hikes consecutive 25 basis points.

GfK’s Staton said the next prime minister will have to provide “a much-needed boost in the country’s economic arm if he is to help improve consumer confidence”.

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