Data released on Friday showed that British retail sales contracted for the first time since April, ending a recent rebound in consumer spending, as scorching temperatures and reduced promotional activity discouraged shoppers. According to the Office for National Statistics, seasonally adjusted retail sales fell by 0.5% month-on-month in July, matching economist forecasts, while the June growth figure was revised down to 0.7%.
Sales at both non-food stores and online retailers declined in July, as some promotional events were held earlier than usual, pulling forward purchases that would typically have occurred in July into June. The ONS reported that non-food sales dropped by 1.3% in July, with clothing stores experiencing the most pronounced decline, and the coverage of clothing discount promotions also fell below the norm for this time of year.
The July heatwave weighed heavily on clothing sales, while household goods and department store sales also decreased, with retailers attributing the downturn to the high temperatures and inventory shortages. Meanwhile, online sales dipped following the conclusion of June's promotional activities. Food stores, however, bucked the trend, with retailers noting that the football World Cup had boosted related sales. Consumers also reduced trips to shops to escape the extreme heat, with meteorological data showing that England experienced its driest July since records began in 1836, and average temperatures across the UK were more than 2 degrees Celsius above normal.
A separate report from the British Retail Consortium indicated that UK retail sales grew by just 1.3% year-on-year in July, half the pace of a year ago and below the average of the past twelve months. Retailers observed that consumers are increasingly favouring small indulgences while postponing purchases of big-ticket items like furniture and electronics. The sunny summer weather, the football World Cup, and a statement on the cost-of-living crisis from Prime Minister Andy Burnham had earlier boosted consumer confidence, with a GfK survey published overnight showing optimism at its highest level since August 2024.
However, slowing wage growth, rising energy bills, and the risk of broader inflationary shocks from President Trump's war on Iran could overshadow this uplift. The confidence boost from Burnham's initial weeks in office may also prove short-lived, as he faces tough policy trade-offs when presenting his first budget this autumn. Sandra Prince, head of consumer business at Lloyds Bank, noted that after an extended period of hot weather across much of the UK, many households may have already purchased what they need for the season, and the sales cycle for popular summer items is also drawing to a close.
The World Cup-driven boost ended in the first half of July, which also reduced opportunities for retailers to capitalise on the warm weather to drive sales. The decline in retail sales further signals that the recent positive momentum in the UK economy may be coming to an end. Data released earlier this week showed that the labour market remains subdued amid heightened domestic and international uncertainty, with weak hiring demand and wage growth slowing to a near six-year low. The number of employees on UK payrolls fell by 13,000 in July, following a similar decline the previous month, while job vacancies dropped further to 707,000 in the May-to-July period, the lowest level since 2021.
Meanwhile, private-sector wage growth excluding bonuses, a key metric closely watched by the Bank of England, slowed to 2.8% in the second quarter, the weakest in nearly six years. Ashley Webb, chief UK economist at Capital Economics, pointed out that all these factors together paint a picture of a softening labour market with cooling trends that are still ongoing. At the same time, UK inflation rose for the first time in four months in July, reaching 2.9%, its highest level since March this year. This reading was broadly in line with the median economist forecast, slightly above the BoE's previous projection of 2.8%, but the formal reversal of the disinflation trend casts a shadow over the economic outlook.
Energy bills were the primary driver of the rebound in headline inflation in July, directly reflecting the quarterly price cap adjustment by energy regulator Ofgem that took effect on 1 July, which raised the cap on household gas and electricity bills by 13%, adding approximately £221 to the average annual household bill, bringing it to £1,862. Specifically, gas prices jumped 14.7% month-on-month in July, the largest monthly increase since October 2022, while electricity prices also rose by 3.6%. However, inflationary pressures have not spread to the broader economy, with core CPI, which excludes energy, food, alcohol, and tobacco, holding steady at 2.6% year-on-year for the third consecutive month.
This reading was slightly above the 2.5% economists had anticipated, but it does not alter the underlying picture of stabilising core inflation. More reassuring for the Bank of England was the unexpected cooling in services inflation, a key indicator of domestic economic pressure, which fell from 3.6% in June to 3.4%. This was largely due to airfare increases in July (+11.7%) being significantly lower than in the same month last year (+30.2%). The CPIH measure, which includes housing costs and is the ONS's preferred inflation gauge, rose from 2.8% to 3.1%.
The Bank of England, which is navigating the policy trade-off between weak demand and inflationary pressures, is closely monitoring UK consumer spending. So far, the soft labour market has reduced the risk of second-round effects from inflation. However, the BoE expects price growth to accelerate further in the coming months as the impact of the Middle East war gradually transmits through the economy. The Bank kept its benchmark interest rate unchanged at 3.75% at the end of July, as expected, with policymakers retaining their options and maintaining guidance that the committee stands "ready to act" to prevent high inflation from becoming persistent, while grappling with recent volatility in energy prices.
Nevertheless, the Bank's policy committee stated that signs of easing domestic inflationary pressures are "clear" and that so far there is "little evidence" that the energy shock has pushed up wage demands or prices in other sectors. Several policymakers who voted to hold rates also indicated that their stance could change if the war ends quickly, with two members, including Deputy Governor Dave Ramsden, suggesting they would consider cutting rates in such a scenario. The weak labour market, easing domestic price pressures, and softer retail sales have bought the BoE's Monetary Policy Committee some time to assess the war's impact on the UK economy. However, ongoing tensions in the Middle East could keep oil prices elevated, which appears likely to intensify domestic price pressures and make it even more difficult for the Bank of England to balance curbing inflation against supporting economic growth.
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