Shoppers cut back as inflation kicks in - and top Bank of England official says it will get worse

Supermarket
After a spell of falling prices, shoppers are cutting back in the face of renewed inflation Credit: Christopher Furlong/Getty Images)

Retail sales are falling at the fastest pace in seven years as higher prices put an end to the shopping frenzy of the past year - and inflation has only just begun to kick in, a top Bank of England policymaker has warned.

Sales volumes fell by 1.4pc in the first quarter of the year, one of the biggest drops since 2010.

But surging inflation meant that households had to spend the same amount of money in the three-month period to receive that smaller quantity of goods, according to the Office for National Statistics.

Economists fear this means a key driver of economic growth has been knocked out, but Philip Hammond, the Chancellor, insisted that the fundamentals of the British economy remained strong. 

Speaking on the sidelines of the IMF spring meeting in Washington, Philip Hammond said: "We don't take too much notice of monthly retail data, they tend to be pretty volatile. The key thing is consumer confidence remains strong, and it remains strong, because we have record levels of employment."

Mr Hammond also said the inflation, which is expected to rise further in the coming months, would be a "one-off phenomenon" and would pass through the economy.

He added that he expected business investment to bounce back in the coming months amid a record employment rate and robust consumer confidence.

"Consumers who are confident means consumers who are spending. Consumers who are spending drive businesses to invest. "Businesses have to some extent postponed discretionary investment, but when consumers go on spending, business have to invest to keep supplying other customers."

Prices rose by 2.3pc in the 12 months to March, matching pay growth and so ending the recent rise in households’ spending power.

That inflation has been driven by the fall in the pound since the EU referendum, which has pushed up the cost of imported goods.

Michael Saunders, an economist who sits on the Bank of England’s interest rate-setting monetary policy committee, said most of the impact of the weak sterling was yet to be felt by shoppers.

The Bank of England predicts inflation will rise to 2.75pc later this year, and Mr Saunders thinks it could rise substantially further.

“With the average levels of sterling and commodity prices over the last few weeks, I would not be surprised if CPI inflation reaches 3pc later this year or early next,” he said in a speech to small businesses.

“Such an outcome might well imply that the near-term squeeze on household real incomes and spending, and on profits in sectors with high import content, will be sharper than the [Bank of England’s forecast] inflation report base case.”

He said that experience from the financial crisis, when the pound dropped and inflation picked up, indicated that inflation would not suddenly drop off once the currency impact has hit shoppers, but could persist for some time.

Analysts believe that shops will attempt to keep prices down to avoid losing customers who have become used to good deals over recent years.

“As retailers contend with significant cost increases in their supply chains it is inevitable that some of this will have to be passed on to their customers. Calculating how willing the public are to accept higher prices will be crucial over the next few months, with retailers attempting to balance the need to protect their margins at the same time as retaining footfall,” said Ian Gilmartin, head of retail and wholesale at Barclays.

“It’s important not to overstate the severity of the figures, as the sector was still able to post monthly year-on-year growth and there were other bright spots, with clothing retailers posting good results boosted by a milder than usual March.

"The late Easter this year may also have slightly disrupted sales patterns, but the overall trend does suggest that it’s going to be a tricky time for the wider industry as we move towards the summer season.”

Economists fear that this shows the economy overall slowed down in the first three months of the year, because strong consumer spending has supported growth over the past year.

That contrasts with economic performance in the eurozone.

Growth is running its fastest pace in six years, according to IHS Markit’s purchasing managers’ index (PMI), a survey of private sector businesses.

The PMI rose to 56.7 this month, up from 56.4 in March and a new six-year high.

Any score of above 50 indicates the economy is expanding.

France is leading the way with a PMI of 57.4, beating Germany’s 56.3 as the services and manufacturing sectors both grow strongly.

The survey also showed inflationary pressures rising in the eurozone, indicating that, as Mr Saunders said, global markets are pushing up prices, as well as the weakness in the pound.

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