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UK Retail Sales Had Worst Year on Record in Spending Squeeze

Shoppers on Oxford Street, London.
UK retail sales fell unexpectedly last month, capping the worst year on record. (Shutterstock)

UK retail sales fell unexpectedly last month, capping the worst year on record after a cost-of-living squeeze forced consumers to pay more for fewer goods.

The volume of goods purchased in shops and online fell 5.8 percent from a year ago, the sharpest December decline since records began in 1997, the Office for National Statistics said Friday. That was more than the 4 percent drop economists had expected. Excluding auto fuel, sales fell 6.1 percent, the most in records going back to 1989.

The figures underline the severity of inflation, which is lingering near the highest level in four decades, draining spending power and causing the sharpest drop in real incomes in decades. The Bank of England is likely to hike interest rates again to bring prices back under control.

Money markets pared bets on where interest rates will peak by two basis points to 4.53 percent according to swaps tied to policy meeting dates.

The drop in retail was driven by non-food sales as “consumers cut back on spending because of increased prices and affordability concerns,” the ONS said. Supermarkets reported people stocked up early for Christmas then pared back in December.

“This was due to increased food prices and the rising cost of living,” said Heather Bovill, ONS deputy director for surveys and economic indicators.

“The biggest income squeeze in a generation continues to hit the UK High Street hard. While we expect the economy to show it stagnated at the end of last year, the unexpected drop in retail sales highlights downside risk to this. Given the ongoing squeeze on incomes, we see consumer spending remaining under pressure going forward,” says Niraj Shah, Bloomberg Economics.

Retailers had reported a mixed picture about sales before the official figures were released.

While high street giant Next Plc reported a better-than-expected Christmas, with sales of full-price items up almost 5 percent year-on-year in the nine weeks to Dec. 30, online clothing titan Boohoo Group Plc’s revenues in the four months to Dec. 31 slid 13 percent against the same period in 2021.

And while Lidl Ltd., J Sainsbury Plc’s and Marks & Spencer Plc all had strong trading over Christmas, shoe company Dr Martens Plc and online fashion store Asos Plc both struggled.

In a sign of how red-hot inflation is eroding consumers’ spending power, sales were 13.6% higher in value terms in December compared with pre-Covid levels, but volumes were 1.7 percent lower. That means consumers are having to pay more to buy less.

Postal strikes in the run-up to Christmas drove more customers into bricks-and-mortar stores over online shopping. E-commerce accounted for 25.4 percent of total sales, down a half percentage point.

Inflation “hit consumers and retailers hard” over Christmas, said Erin Brookes, managing director and head of retail in Europe at restructuring firm Alvarez & Marsal.

“The combination of rail and postal strikes in December provided retail with a double whammy of disruption, restricting the number of shoppers in-store and parcels reaching doorsteps in time for Christmas,” she said.

Retail sales dropped 1 percent from November after a decline of 0.5 percent the month before. Economists had expected a gain of 0.5 percent. A separate survey by market-research firm GfK showed consumer sentiment slipped back in January and remains deep in negative territory.

The figures prompted warnings that retailers should brace for worse to come.

“With a renewed fall in consumers’ confidence in January, that weakness is very likely to continue as the broader economy slips into recession in 2023,” said Olivia Cross at Capital Economics. “Some of the resilience the economy towards the end of last year appeared to peter out.”

By Lucy White and Tom Rees

Learn more:

UK Retail Sales Fall More Than Forecast as Prices Bite

UK retail sales plunged more than forecast in March as the cost-of-living crisis squeezed incomes and consumers braced for higher taxes and energy bills.

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