Economic Monitor: Inflation begins to ease
04 August 20233 Minute Read
Harvir DhillonEconomist | BRC
Kris Hamer PhDDirector of Insight | BRC
Report Excerpt
Encouragingly, inflation eased in last month, from 8.7% to 7.9%, although it is expected to be more than double the 2% target rate by the end of 2023. The softening in inflation was enough for the Bank of England to opt for a 25 basis point interest rate rise, with the Bank Rate now at 5.25% - its highest rate since February 2008.
Retail sales have held up well this year so far, despite higher interest rates and high input costs. However, strong wage pressures are forcing input costs to remain elevated, which is also feeding into historically high inflation in the service sector. Despite a slow fall in inflation over the next 6 months, strong wage settlements suggest real household incomes will begin to recover in the second half of this year.
The economic situation makes for a challenging trading environment for retailers. With interest rates expected to be higher for longer, making borrowing for businesses and households more expensive, financial stress on businesses and consumers (especially those that are overleveraged) will increase. In Q2 2023, retail insolvencies increased by 16% year on year - a trend that is expected to continue. We expect economic growth to be broadly flat over the next 12 months, and the risk remains of persistent inflation domestically as well as from global commodity price volatility, particularly following the end of the Black Sea Grain Initiative.Harvir Dhillon, Economist at the British Retail Consortium
Overview
- GDP fell in May by 0.2%, following an increase of 0.2% in April. Services activity was flat, with the largest downward ward contributor being wholesale and retail trade, seeing deteriorating performance. Consumer-facing services witnessed a fall of 0.2%, and within this the largest downward contribution came from pubs, restaurants and bars.
- Inflation eased in June and the Consumer Price Index fell to 7.9%. Of the headline rate, 1.8% emanates from housing and energy costs, 2.0% from food and 1.2% from restaurants and hotels. Fuel prices continue to fall, with these figures registered when petrol was £1.43 per litre and diesel £1.46.
- The BRC-KPMG measure of retail sales picked up to 4.9% in June, up from 3.7% in May.
- Between January to March 2022 and January to March 2023, the average regular pay (excluding bonuses) was estimated at £607 per week in nominal terms (not adjusted for inflation), higher than the estimate for a year earlier (£567 per week). It was estimated at £474 per week in real terms (constant 2015 prices), lower than the estimate for a year earlier (£477 per week).