British retail sales in May defied expectations by posting a surprising increase, buoyed by an additional bank holiday celebrating the coronation of King Charles. The data suggests that most consumers were managing to cope with the squeeze on their spending power caused by high inflation.

This unexpected growth in retail sales comes on the heels of the Bank of England’s decision to raise interest rates to their highest level since 2008 as part of their efforts to combat inflation.

Surprising Retail Sales Growth:

Contrary to a Reuters poll forecast of a 0.2% decline, official data released by the Office for National Statistics revealed a monthly increase of 0.3% in retail sales volumes for May. This positive growth follows a rise of 0.5% in April. The news had a positive impact on the value of the sterling against both the U.S. dollar and the euro.

Consumer Resilience Amid Inflation:

The surge in inflation has been taking a toll on household spending power, with the inflation rate remaining at 8.7% in May, defying predictions of a slowdown. Despite these challenges, the latest retail sales figures indicate that British consumers are currently weathering the storm of rising costs.

Expert Analysis and Projections:

Economists at Capital Economics were pleasantly surprised by the retail sales figures, acknowledging that they exceeded expectations. However, they maintain their belief that the growing burden of higher interest rates will eventually lead to an economic downturn, resulting in a 0.5% decline in real consumer spending. On the other hand, Samuel Tombs from Pantheon Macroeconomics suggests that a consumer-led downturn may be avoided due to the offsetting effect of reduced energy bills, which more than compensates for the impact of increased borrowing costs for mortgage-holders.

Positive Consumer Sentiment:

In addition to the retail sales data, a separate survey published in June indicated a rise in British consumer sentiment for the fifth consecutive month. This positive sentiment reached its highest level since January 2022 as households grew more optimistic about their financial situations and the overall economy.

Factors Behind Retail Sales Growth:

The Office for National Statistics attributed the growth in retail sales to several factors. Online retailers performed particularly well, selling outdoor goods and summer clothing as the weather improved. Fuel sales also rebounded in May following a dip in April. Garden centres, DIY stores, and clothing stores experienced increased sales due to the favorable weather conditions. However, food sales declined by 0.5% compared to April, influenced by rising supermarket prices. Additionally, many people opted for takeaways and dining out during two of May’s bank holidays, which fell within the reporting period.

Impact of Seasonal Adjustments and Annual Comparison:

The Office for National Statistics clarified that the one-off bank holiday celebrating the coronation of King Charles was not factored into its seasonal adjustments. Consequently, this event contributed to the boost in the reported sales volumes for May. On an annual basis, retail sales volumes were 2.1% lower than the previous year, surpassing economists’ predictions of a 2.6% decline.

Inflation’s Toll on Consumers:

The impact of inflation on consumers was starkly evident in the Office for National Statistics figures. While spending in value terms in May was 17% higher than in February 2020, just before the onset of the COVID-19 pandemic in Britain, retail sales volumes were down by 0.8%. This contrast highlights the strain caused by inflation on consumers’ purchasing power.

Conclusion:

The unexpected rise in British retail sales in May, despite the squeeze from high inflation, offers a glimmer of hope for the economy. While experts hold differing views on the long-term effects of rising interest rates and inflation, the resilience of consumers, along with positive consumer sentiment, suggests that a consumer-led downturn may be averted. However, ongoing challenges, including inflationary pressures and changing consumer preferences, will require careful monitoring in the coming months.