UK retail sales much worse than expected as households feel the pinch

UK retail sales shrank much more than expected in May, according to official data published on Thursday that shows how households are feeling the pinch from rising inflation and falling wages.

Retail sales excluding automotive fuel fell 1.6% month-on-month in May, according to the Office for National Statistics, when a 0.9% decline had been expected after a revised 2.2% improvement the previous month.

Compared to May last year, retail sales were up only 0.6%, which was short of the consensus forecast for a 1.9% gain after a revised 4.6% increase from April.

The UK retail industry has seen sales falter in 2017 as household spending is squeezed by rising prices and faltering wages, with data earlier in the week showing consumer prices rising at an annual pace of 2.9% and pay growing at a rate of just 1.7%.

Including auto fuel sales were down 1.2% on a monthly basis, versus a 0.8% estimate and after a 2.5% rise the prior month.

On a yearly basis retail sales including fuel were up 0.9% compared to the market's expectation of a 1.6% gain after a revised 4.2% improvement from April.

The UK retail sales, excluding auto fuel, contracted by 1.6%, worse than -1.0% expected by analysts and 2.0% printed a month earlier.

Sales volumes were lower across most categories, with non-food sales down 2.3% month-on-month with a sharp 5.7% decline in household good purchases, while food sales were down 0.9%.

Falling retail sales are no surprise, said economist Chris Williamson at IHS Markit, when prices are rising faster than wages, as data earlier in the weak has shown.

After the strong sales seen in April, which was linked to the timing of Easter, this means second quarter sales are still running 1.4% higher than the first quarter on average, and are up 0.6% in the latest three months compared to the prior three months, he noted.

"However, the latest decline means sales have now fallen in five of the past seven months, which is a clear warning sign that households are feeling the pinch."

With real average weekly pay falling at an annual rate of 0.4% -- the steepest decline seen since 2014 -- Howard Archer at the EY Item Club said the squeeze on consumers is likely to get worse before it starts to ease.

Inflation could well be in a 3-3.3% range over the second half of the year, with earnings growth looking set to remain muted for some time to come as companies look to limit their total costs in a challenging environment.

“Furthermore, already brittle consumer confidence and caution over making major purchases could be magnified by heightened economic and political uncertainties following the general election," he said.

“There is some support for consumer sending coming from current decent employment growth. However, it is questionable if this can continue in the face of weakened UK economic activity, increasing business uncertainty, and concerns over the UK’s outlook.”

Sterling retreated to 1.2704 against the dollar after the release of the ONS data.

Pound traders continue swinging up and down on major political developments after last week’s UK election and amid a busy economic calendar, said analyst Ipek Ozkardeskaya at London Capital Group.

"The weakness in today’s retail sales print, following Tuesday’s solid inflation and Wednesday’s soft wages growth data, inclined the market in favour of a softer pound."