July was a good month for retail land, as shoppers, apparently immune from all the Brexit related doom and gloom, opened up their purses, and dug into their pockets, and spent.
Retail sales rose in July, just like they did in the previous 38 months, making it a good run for retail sales. In July, sales by volume were up 5.9% on the year before, and by 3.6% measured in pounds, shillings and pence.
Compared to the month before, sales volumes were up 1.4%. and by 1.6% by value.
Presumably, then, if sales by value grew faster over the last month than by volume, price discounting was less of a factor.
So why? Ruth Gregory, UK Economist at Capital Economics was not surprised by the news. She said: “The fundamentals – such as low interest rates, inflation and a strong jobs market – remain supportive.”
But perhaps a more important question is will it last?
You need to figure in time. The pound is down, but as a rule, it can take up to 18 months before a fall in the pound shows up in the inflation figures. In July, UK inflation was a mere 0.6%, we don’t have the figures for how wages did in July yet, but we can say that, in the three months to June, average wages with bonuses rose by 2.4%, while inflation was 0.5%. In other words, in the year to June, real wages grew at a brisk pace.
The fear is that in around a years’ time, thanks to the recent falls in the pound, inflation may be above 3%, and prices will be rising faster than wages, meaning that real wage growth will be negative.
We have been here before, recall the pound fell sharply in 2008, and by 2011 inflation was up to 5%. Between May 2010 and the beginning of 2014, inflation was greater than wages increases. This hit retail hard, and gave the advantage to price discounters.
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics said: "July’s retail sales figures show that consumers have been protected from the immediate fallout of the Brexit vote, but with firms intending to stop hiring and inflation set to soar, the high street is set for a tough year. Sales volumes rose in all major categories, although the 3.5% leap in clothing sales clearly reflected a rebound from weakness in June due to heavy rainfall. Retailers also had to continue to cut prices rapidly—the retail sales deflator, excluding fuel, fell 1.7% year-over-year—in order to get consumers to open their wallets.”
Ruth Gregory added: "We would be wary about reading too much into the jump in July’s figures. The month-on-month data tend to be fairly volatile and temporary factors such as July’s warm weather seems to have boosted spending. Meanwhile, it will probably take some time before we see the full effect on the consumer of a weaker labour market and an increase in prices. So it would be fairly surprising if household spending growth didn’t slow at all in the aftermath of the leave vote.”
But at least Ms Gregory finished on a more positive note. She said: “Nonetheless, today’s figures provide us with reassurance that we won’t see a material collapse ahead.”
