UK: Retail sales highlights growth risks trump inflation fears - ING

UK reported weak retail sales amidst deepening political and economic uncertainty which are more important issues for the BoE than a temporary rise in inflation, according to James Knightley, Senior Economist at ING.

Key Quotes

“UK retail sales have fallen more than expected in May, underlining the case for stable monetary policy from the Bank of England later today. Sales ex auto fuel fell 1.6%MoM versus the consensus forecast of 1%. It is a choppy series that is heavily impacted by seasonal effects such as Easter and the growing popularity of special events such as Black Friday discounts. Therefore, we tend to focus on the annual rate of growth, which dropped to 0.6%YoY – the weakest rate for four year.”

“The weakness was broad based with all major components seeing drops. This situation is unlikely to improve. The squeeze on household spending power because of slowing wage growth and rising prices of goods and services is clearly the main story here. So far, household spending has been supported by increases in unsecured borrowing, but this looks unsustainable and so we expect to see worse numbers for retail sales in coming months. There will be more downside risk should the labour market weaken further given the economic uncertainty caused by Brexit.”

“The combination of political and economic uncertainty trumps a temporary uptick in headline inflation. This leads us to conclude that there is little prospect of a Bank of England rate hike until there is much more confidence on the prospects for post Brexit Britain.”