Retail sales up - and inflation unexpectedly down

Successful clearance sales on the high street have boosted sales - and dragged down overall price growth.

by James Taylor
Last Updated: 19 Aug 2013
An unexpected boost for the Government and the Bank of England: retail sales bounced back slightly in June, while official figures revealed that the Consumer Prices Index measure of inflation surprisingly fell to 4.2%. And it looks as though the explanation is the same for both: retailers have been forced to offer big discounts to try and lure reluctant customers, which has apparently succeeded in increasing volumes, while also reducing inflation. That'll take the pressure off the Bank over interest rates – though it's not necessarily good news as far as the recovery is concerned...

The British Retail Consortium said today that total sales were up 1.5% in June - and even the like-for like figure of -0.6% was a big improvement on the 2.1% drop in May. With lots of shops starting their summer sales early to try and boost demand, smaller home goods were apparently the big sellers – although clothing and footwear sales remained flat, possibly because shoppers had already filled their boots during the April heatwave. BRC director-general Stephen Robertson, not a man known for hyperbole, conceded the figures were 'not as bad as they could have been' (although as he points out, it's a poor do when 1.5% total sales growth counts as such).

One additional benefit of all this discounting was that it pulled down the overall rate of inflation (the first time this has happened in June for eight years, apparently). The City had expected CPI to hold steady at 4.5%, but instead it fell to 4.2%. Food prices are still rising – up 0.9% in the month, or 6.9% year-on-year – but that was offset by lower prices for games, toys and clothes.

Of course, we shouldn't forget that CPI remains well above the Bank's 2% target – and indeed has been for 35 of the last 41 months (which some MPs argue means Sir Mervyn King shouldn't have had his recent pay rise). And it seems quite likely that CPI will go up again in the coming months, as higher energy bills feed through into the calculation. But King and co will be cheered by last month's fall in the core CPI index, which strips out food and energy costs, from 3.3% to 2.8% - strengthening his argument that inflation will fall of its own accord without the need for higher interest rates. Some analysts now think it might be 2013 before rates go up.

We can't help feeling that's a good thing. Today's BRC figures reveal that retailers are having to work very hard to persuade customers to part with their cash, particularly for stuff they don't really need (as opposed to food and fuel). So anything that constrains spending power even further will result in even more pain for the high street – and make the recovery even harder.

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