UK retail sales fall to two-year low as inflation-hit consumers cut spending

Figures contrast with expectations of a rise and send gilt yields lower

British retail sales have fallen to their lowest level since February 2021 as consumers curb their spending in the face of punishing inflation, according to data that sent gilt yields lower.

The quantity of goods bought in Great Britain declined 0.3 per cent in October compared with the previous month, the Office for National Statistics said. The figures contrasted with expectations of a 0.3 per cent rise.

The sales data highlight the pressure on households ahead of chancellor Jeremy Hunt’s Autumn Statement next week and will bolster expectations that the Bank of England is poised to lower interest rates next year. 

The fall to the lowest volume of sales since February 2021 suggests household spending is weak ahead of the Christmas shopping season, traditionally the busiest for retailers. 

The figures represented a 2.7 per cent drop from October 2022, much larger than the consensus forecast of a 1.5 per cent year-on-year decline, as people bought fewer but more expensive goods.

Thomas Pugh, economist at audit firm RSM UK, said the retail figures added “to the risks that the economy will slide into a recession at the end of the year”.

Separate ONS data last week indicated that a fall in household spending contributed to the economy flatlining in the three months to September. 

The yield on rate-sensitive two-year gilts, which moves inversely to price, fell sharply after the retail sales figures were released before recovering to around 4.50 per cent, down 0.04 percentage points on the day. 

Benchmark 10-year gilt yields were 0.08 percentage points lower at 4.08 per cent, while the pound was up 0.2 per cent against the dollar.

Markets are now pricing in nearly 30 basis points of cuts to the BoE’s benchmark interest rates — currently at a 15-year high of 5.25 per cent — by June.

Revised data also published on Friday showed that retail sales by volume had contracted by 1.1 per cent in September — more than previously estimated.

The retail data give an early indication of the state of the consumer sector in the final quarter. Erin Brookes, European retail and consumer lead at management consulting group Alvarez & Marsal, said a second consecutive monthly decline in retail sales did not “bode well for the high street as we enter the festive season”. 

In an indication of the impact of high inflation, October’s figures showed that consumers bought 3.1 per cent fewer goods than in the pre-pandemic month of February 2020, but spent 16.9 per cent more.

UK inflation dropped to a two-year low of 4.6 per cent in October thanks to lower energy costs, according to data published on Wednesday, but consumer prices remain one-fifth higher than in early 2021. 

Heather Bovill, ONS deputy director for surveys and economic indicators, said October had been a “poor month for household goods and clothes stores [which suffered from] cost of living pressures, reduced footfall and poor weather”.

Clothing stores registered a 0.9 per cent fall in sales volumes, with the mix of wet and warm weather hitting demand for winter wear and footfall. 

Sales volumes in household goods stores dropped 1.1 per cent, driven by a sharp decline in furniture purchases. Department stores also reported contracting sales, with some retailers pointing to the drop in consumer confidence.

Samantha Phillips, partner at consultancy McKinsey & Co, said that, given the slow start to the quarter, “retailers will be fighting to win discretionary spend of both their loyal and new customers on Black Friday and as we head into December”.