A drop in retail sales and an unexpected fall in government borrowing highlighted the double-edged impact of the Bank of England’s fight against inflation today.
For the high street, it meant alarm bells were ringing more loudly than the tills as hard-pressed consumers kept hold of their cash, sending a crucial part of the economy back toward recession.
For the government, a fall in inflation cut the interest payments due on some of the bonds used to raise cash in the capital markets. That offered some relief for the Chancellor Jeremy Hunt into his Autumn Statement in November, even with a national debt burden almost at the same size as the economy.
For policymakers in Threadneedle Street, it was a stark reminder of the tricky balancing act they face in keeping runaway inflation heading back toward their 2% target, without inflicting damage on the UK’s already flatlining economy.
Shops looked most exposed to the theat. Retail sales were down 0.9% in September, when consumers should be stocking up on back-to-school supplies alongside knitwear and coats for the autumn. It was a much bigger fall than the 0.3% forecast and the largest monthly fall outside the pandemic since December 1994.
The late-summer heatwave deterred some of the usual seasonal spending, But the Office for National Statistics also revealed a 1.9% fall in non-food sales volumes. It said retailers were pointing to “continuing cost of living pressures.” Consumers cut back on big-ticket spending, with department store sales down 1.6% and household good sales lower by 2.3%.
And the trends are running longer that for the month – overall quarterly sales volumes in the three month period to the end of September were down 0.8%.
Analysis from Capital Economics said the numbers suggest the UK retail sector is now “back in recession”, having declined for back-to-back quarters.
The consultancy’s Alex Kerr added: “We suspect the lagged effect of the Bank of England’s interest rate hikes may be weighing more heavily on sentiment.”
The slowdown will increase nerves into the make-or-break Christmas trading period, on which so much of the high street depends. It will put extra pressure on retailers into the peak Black Friday sales season from late November.
Adam Bullock, UK Director at TopCashback said: “Shoppers will be seeking to make the most of the seasonal spends with big ticket bargains, so retailers need to deliver worthwhile offers. This is particularly important during a time when many are keeping a tight rein on household budgets.”
Meanwhile, September public borrowing fell by £1.6 billion year-on-year to £14.3 billion. City experts had expected borrowing of £18.3 billion. The difference came about as the drop in inflation, as identified by the Retail Price Index, cut the interest bill on some of the bonds issued by the government.
Russ Mould, investment director at AJ Bell said: “Approximately one quarter of the government’s debt is index-linked and it has benefited from lower inflation.”
The better news came in the run-up to the Autumn Statement on tax and spending plans, due next month.
Nonetheless, total government borrowing stands at about £2.6 trillion, up 2% year-on-year. That means net debt is now running at 97.8% of GDP, or the value of all the goods and services produced by the economy.
Mould added: “The big issue now is whether the government feels capable of splashing the cash. It’s unlikely given that Jeremy Hunt is looking to get the country’s finances in a significantly better shape.”
And there was a sense of wariness on the market in UK government debt, where the premium demanded by investors to lend to the government stayed around some of its highest levels since the late 1990s. The yield on 30-year bonds was up by another three basis points, beyond 5.10%.
