Retail sales rose by 0.3% month-on-month (m/m) in May, building on a 0.5% rise in April. May’s outturn leaves retail sales volumes up 1.7% in the year to date. Non-store and automotive fuel sales led the growth in headline retail volumes, boosted by the warm weather and falling petrol prices. Food store sales were the main drag on retail volumes, reflecting the impact of an extra bank holiday (with more people switching to takeaways and fast food) and near-record price inflation in the sector.
The data is the latest in a range of indicators showing an unflagging resilience in consumer spending. This was a feature in the Bank of England’s interest rate deliberations last week, which culminated in a decision to raise Bank Rate by 50 basis points.
However, the outlook for household spending itself is mixed: higher interest rates will push up debt service costs for mortgage-holders later this year, increasing strain on finances. Moreover, stubbornly high inflation will continue to erode real household incomes for the foreseeable future. And, despite the recent resilience in consumer activity, surveys suggest that households are still responding to cost-of-living pressures by reducing outlays on non-essential purchases.
However, this is balanced against some tailwinds to spending. There will be continued support from a tight labour market, with the latest ONS data showing another rise in employment in the three months to April, which underpinned an acceleration in private sector wage growth over the same period. Energy bills look set to fall from July, providing further support for households’ spending power. Additionally, while inflation will remain high, it should fall over the course of this year, giving some breathing space to households later in 2023.
Perceptions of an improving outlook for the economy and personal finances also seem to be lifting consumer confidence. GfK’s consumer confidence index gained ground for a fifth month in a row, reaching its highest level since Jan 2022. However, even though sentiment indicators have steadily trended upwards since the end of last year, GfK’s index remains below its long-term average, and so should not be taken as heralding a sustained recovery in demand just yet.