High UK inflation hits sales, confidence and activity

Data released on Friday showed that high UK inflation is hitting retail sales, business activity and consumer confidence, strengthening predictions of an economic recession this year.

The volume of retail sales in Great Britain fell for the second consecutive month in June as high inflation pushed consumers to tighten their belts.

A closely watched survey showed that business activity slowed in July to its weakest pace since the Covid pandemic lockdown of early 2021 as high inflation hit demand.

Moreover, research company GfK revealed that UK consumer confidence remained at minus 41 in July, the lowest since records began in 1974.

The data underscored the impact of surging inflation — which hit a 40-year high of 9.4 per cent in June — on household finances and business activity.

Joe Staton, client strategy director at GfK, said confidence was “severely depressed this month as the impact of soaring food and fuel prices and rising interest rates continues to darken the financial mood of the nation”.

The quantity of goods bought in Great Britain fell 0.1 per cent from the previous month — the second consecutive decline — but consumers spent 1.3 per cent more than in May due to rising prices, according to data from the Office for National Statistics.

Previously, growth in the volume and value of retail sales has been similar, but since February the difference between the two has been higher than 1 percentage point as inflation has reduced what people can buy with their money.

Recorded purchases have been declining or stalling since October last year, as sales growth volumes have been revised down in recent months. The figures do not include spending in bars and restaurants.

Heather Bovill, ONS deputy director for surveys and economic indicators, said the trend for retail sales “is one of decline”.

Food sales ticked up 3.1 per cent due to the Queen’s jubilee celebrations in early June — the only sector to report an increase. In contrast, sales of fuels, clothing and household goods fell sharply with retailers suggesting consumers were cutting back on spending due to higher prices.

This comes as an ONS survey, published on Friday, revealed that half of the population reported buying less food in the first half of July as a result of soaring prices.

The survey found that nearly half of the population found it difficult to pay for their energy bills and more than one in five have had to borrow money or take out credit in the past month compared with last year.

The hit to households was mirrored in the monthly S&P Global/CIPS purchasing manager survey which showed the flash composite output index dropping to 52.8 in July from 53.7 in June and the lowest reading since February 2021.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “UK economic growth slowed to a crawl in July.” He added that forward-looking indicators suggested that “worse is to come”.

Manufacturing order books deteriorated for the first time in one and a half years. Output was dragged down by capacity constraints arising from shortages of materials and staff.

However, the survey also pointed to some softening in input cost pressure. Paul Dales, economist at Capital Economics, predicted inflation would lead to a 3 per cent fall in real household disposable incomes this year and another 2 per cent decline next year. “As a result, a recession now feels inevitable,” he said.

Despite faltering demand and early signs of easing costs, James Smith, economist at ING, expects the Bank of England to raise rates by 50 basis points at its August meeting, after five consecutive 25 basis points increases.

GfK’s Staton said the next prime minister will need to deliver “a much-needed shot in the economic arm of the country if they are to help improve consumer confidence”.