BETTER weather helped to increase retail sales in May, despite fragile consumer confidence due to Brexit.
In the second quarter as retail sales rose a robust 1.3% month-on-month (m/m) in May after bouncing back in April from March’s weather-related slump.
A negative set of April manufacturing, construction and trade data fuelled concerns about the economy’s strength.
Consumer confidence has been fragile in the face of economic and Brexit uncertainties.
The main support to consumer spending has come from employment which reached a new record high in the three months to April.
While consumer purchasing power has improved overall in recent months, with inflation moderating and earnings growth firming overall, progress has been slow. Earnings growth also suffered a relapse in April.
The recent rise in oil prices to a three-and-a-half year high could lead inflation to be higher-than-expected in the near term and hold back the improvement in consumer purchasing power.
At the very least, recent higher fuel prices mean that consumers have less to spend on discretionary items.
Higher fuel prices caused shop price inflation to rise back up to 2.4% in May from a 14-month low of 1.9% in March. Excluding fuel prices, shop price inflation was down to a 14-month low of 1.8% in May.
The Bank of England looks a racing certainty to keep interest rates unchanged next Thursday after the June MPC meeting. The robust May retail sales performance will likely lift expectations that the Bank of England will hike interest rates in August, but it currently looks to be a close call given recent mixed news on the economy.
Howard Archer, chief economic advisor to the EY Item Club, said: “Retail sales volumes were up 3.9% year-on-year (y/y). This followed volumes rebounding 1.8% m/m in April after a 1.1% slump in March when they had been dragged down by the severe weather (which particularly affected fuel sales). Retail sales were up 1.4%y/y in April.
“The underlying performance in retail sales showed improvement as volumes rose 0.9% in the three months to May compared to the three months to February. Food sales were up 1.1% m/m in May as they were boosted by the good weather and the Royal Wedding. Non-food sales rose 0.7% m/m in May with sales of household goods reportedly boosted by the Royal Wedding.
“Some disappointing news for consumers came from annual shop price inflation rising back up to 2.4% in May from 2.2% in April and a 14-month low of 1.9% in March. This was due to higher fuel prices. Shop price inflation excluding fuel moderated to a 14-month low of 1.8% in May from 2.0% in both April and March.”
He added: “The extended, marked squeeze on consumers has eased overall in recent months, with earnings growth marginally back above inflation. Healthy recent employment growth is also supportive to consumer spending. Nevertheless, consumers are still under significant pressure and this was highlighted by a disappointing relapse in earnings growth in April.
“Although consumer price inflation was stable at 2.4% in May – which is the lowest rate since March 2017 and down from a peak of 3.1% last November – it looks likely to edge up over the summer due to the impact of recently higher oil prices.”
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