Retailers suffered tough trading in February after a squeeze on household incomes forced consumers to spend more money on food and essential items.
The British Retail Consortium, the lobby group for high street shops, said more of consumers’ monthly salaries were being swallowed up by higher prices for food, leaving little cash leftover to spend on other items.
Helen Dickinson, chief executive of the BRC, said consumers wanted to spend but “they just don’t have the resources to do so”.
What is inflation and why does it matter?
Inflation is when prices rise. Deflation is the opposite – price decreases over time – but inflation is far more common.
If inflation is 10%, then a £50 pair of shoes will cost £55 in a year’s time and £60.50 a year after that.
Inflation eats away at the value of wages and savings – if you earn 10% on your savings but inflation is 10%, the real rate of interest on your pot is actually 0%.
A relatively new phenomenon, inflation has become a real worry for governments since the 1960s.
As a rule of thumb, times of high inflation are good for borrowers and bad for investors.
Mortgages are a good example of how borrowing can be advantageous – annual inflation of 10% over seven years halves the real value of a mortgage.
On the other hand, pensioners, who depend on a fixed income, watch the value of their assets erode.
The government’s preferred measure of inflation, and the one the Bank of England takes into account when setting interest rates, is the consumer price index (CPI).
The retail prices index (RPI) is often used in wage negotiations.
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The consumer spending squeeze has pushed several well-known high street names into financial trouble, with Toys R Us and Maplin the latest casualties to go into administration last week, while Mothercare joined the growing list of chains planning to close stores.
Overall, like-for-like retail sales rose by 0.6% from February 2017, mostly on food, which grew by 2.8% on the previous year.
Cheap credit and an extension of post-Christmas discounting lifted furniture sales from a slump in January, but the recovery was too small to prevent a decline of 1.1% in non-food sales.
Dickinson said: “The headwinds to retail spending continued to blow strong in February. Inflation is still eating into shoppers’ budgets, pushing them to spend a greater share of their income on essentials and leaving less left over to buy discretionary, predominantly non-food, retail items.
“At the same time, weak growth in household earnings is keeping overall sales low,” she added.
Monthly figures for the services sector from IHS Markit, excluding retail, showed that firms were expecting the consumer squeeze to end soon as the higher valued pound brought an end to high rates of inflation.
Analysts said a strong showing by the financial services sector was behind a recovery in the IHS Markit/Cips purchasing managers index for the services sector from a 16-month low in January of 53 to a four-month high of 54.5 in February, where a figure above 50 indicates expansion.
Chris Williamson, chief business economist at IHS Markit, said consumers remained under pressure after a year-long inflationary squeeze on their incomes, but the Bank of England was still likely to raise interest rates in May.
He said: “The BoE seems keen to normalise interest rates even if output growth is below levels it would normally like to see when tightening policy. With policymakers sounding hawkish even following the January fall in the PMI to a one-and-a-half-year low, the February upturn surely leaves a May rate hike very much in play.”
Elizabeth Martins, UK economist at HSBC, said earlier surveys showing the construction sector bouncing back from recession and the manufacturing sector expanding were consistent with real GDP growth of 0.4% in the first quarter of 2018.
“This is also consistent with the 1.5% annual growth the BoE say is the UK’s speed limit. So, the monetary policy committee do not need to see an acceleration from current growth rates to justify a rate rise in May.”
She said it was possible the snow and freezing weather last week would dent growth in the first quarter, but the underlying picture would remain the same.