Retail Sales fall as nervous consumers keep money in their pockets

Rocketing inflation helped to push retail sales down by a higher-than-expected 0.8% in February, according to data from the Office for National Statistics (ONS).

The fall follows a 1.5% increase in spending in January as consumers splurged in the sales and bought forward purchases of big-ticket items before the VAT rise. Despite this, spending levels have fell below pre-Christmas levels in February suggesting a further weakening in consumer confidence.

Prices on the high street rose by 2.4% month-on-month to February as firms began to pass on the VAT rise and increases in commodity prices. Food prices were up by 5.3% compared to this time last year while the price of non-food items rose by a record 3% since January.

Vicky Redwood, senior UK economist at Capital Economics, said: “February’s 0.8% monthly drop in UK retail sales volumes adds to evidence of a significant slowdown in consumer spending in the last few weeks.

“The level of sales has now fallen below the pre-snow level in November, suggesting an underlying slowdown is at work too – consistent with the cautious noises from many retailers recently.

“What’s more, the outlook for spending remains pretty bleak. Although the chancellor provided some modest help for consumers yesterday, real incomes still look set to fall sharply this year.”

The ONS figures are a further blow to the coalition’s plans to slash the country’s budget deficit after the Institute for Fiscal Studies warned that slower growth and rising prices could spell trouble for chancellor George Osborne’s program of aggressive cuts.

Consumer spending accounts for over half of the UK economy so any fall can have a knock-on effect on GDP which contracted by 0.6% in the final quarter of 2010. The Office for Budget Responsibility has already downgraded the UK’s growth forecast from 2.1% to 1.7%.

The figures suggest that consumers under pressure from rising prices, stagnant wages, the threat of unemployment and cuts to benefits are being more cautious with their money. This has started to be reflected in bleak updates from companies like John Lewis and Sainsburys. The country’s third largest grocer recorded a weak 1% rise in like-for-like sales in the final quarter of its trading year.

Retail analysts at Evolution Securities said: “With the consumer facing falling disposable income, sales are being spread more thinly. The UK has never seen sustained negative like-for-like sales across the industry before, but economics and mathematics suggests that this will be the new norm for the foreseeable future.”

Charles Davis, an economist at the Centre for Economics and Business Research, said: “Households are being forced to retrench in the face of a higher cost of living and continued weakness in earnings growth.

“While the fuel duty cut provides some help, the headwinds for the consumer remain strong, so we think consumer spending is unlikely to grow in real terms in 2011.”

Source : Totally Money.com

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