Household squeeze as inflation hits highest level for five years

Retail sales including auto fuel dropped 0.8 percent month-on-month in September, reversing a 0.9 percent rise in August, figures from the Office for National Statistics revealed Thursday.

Inflation in the United Kingdom has risen to its highest level in five years, squeezing the spending power of households but giving a boost to pensioners who will enjoy an increase in their state income.

Economists had expected a fall back in the rate of annual retail sales growth, but not to this extent.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown, said: "September's retail sales figures show some evidence of belt tightening, with discretionary spending taking a particularly big hit, as shoppers prioritise more essential items as prices rise".

Store prices continue to rise across all store types and are at their highest year-on-year price growth since March 2012 at 3.3 per cent.

United Kingdom retail sales fell more than expected in September, as inflation fuelled by a post-Brexit vote fall in the pound continued to chip away at household budgets. Non-store retailing sales (i.e. mainly online and mail order) rose 0.2% over the month.

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In the third quarter, retail sales grew 1.5 percent, the lowest pace since the second quarter of 2013. This was also weaker than the expected 2.1 percent. Issues around consumer finances, spending power and rising cost pressures are already challenging the industry: "an interest rate rise could cause an additional headache for retailers in the lead up to Christmas".

"These latest figures will however give the Bank of England further food for thought when it comes to their impending decision on interest rates".

Average wages are rising by 2.1 per cent, according to the figures for July.

Inflation looks likely to hover at 3% or just above for the rest of 2017, he noted, with earnings growth showing little sign of picking up despite the unemployment rate coming down to 4.3%.

"As demand softens in much of the industry, retailers will have to make hard decisions about the extent to which they are able to discount in the run up to Christmas to encourage consumers to part with their cash". "Meanwhile, lenders are becoming more reluctant to provide unsecured credit to consumers".

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