UK Retail Sales Tops Estimates But Cools Year-on-Year; GBP Slides Toward $1.35

UK Retail Sales Top Estimates But Cools Year-on-Year

UK shoppers tightened the purse strings, fueling hopes for a softer inflation outlook — lifting the chances of a Bank of England policy adjustment.

Retail sales rose 0.5% month-on-month (MoM) in August, mirroring July’s increase. Retail sales trended higher for the third consecutive month, tracking the first quarter and potentially fueling demand-driven inflation. Economists expected retail sales to rise 0.3%. However, on an annual basis, retail sales were up 0.7%, slightly below July’s revised 0.8% pace (initially reported at 1.1%).

Beyond the headline figures, the monthly report highlights strong sales volume growth in non-store retailers, clothing stores, and butchers and bakers. Retailers attributed the uptick to good weather.

Could resilient shoppers derail BoE’s easing path?

For BoE Monetary Policy Committee Members, slower year-on-year sales raise a pressing question: How will rising wages and falling employment affect consumption and demand-driven inflation?

Will Inflation Report Revive Rate Cut Bets?

Ahead of August’s retail sales data, UK inflation and labor market data sent the Bank of England mixed signals. The annual inflation rate remained at 3.8% in August, while core inflation eased from 3.8% to 3.6, but remains well above the BoE’s 2% target.

Meanwhile, UK average earnings, including bonuses, increased 4.7% in the three months to July year-on-year, up from a 4.6% rise in June. However, payrolled employees fell in July and are expected to drop further in August, signaling a cooling labor market and potentially softer wage growth.

This mixed picture leaves policymakers torn between risks to growth and inflation.

The Bank of England may need to see evidence of wages softening. Softer wage growth may curb spending. A drop spending and cooling headline inflation could support an interest rate cut.

On Thursday, September 18, the BoE kept interest rates at 4%. Crucially, the number of votes in favor of a rate cut fell from 5 to 2. The vote count suggested a less dovish Monetary Policy Committee.

Bank of England Governor Andrew Bailey commented:

“Although we expect inflation to return to our 2% target, we’re not out of the woods yet, so any future cuts will need to be made gradually and carefully.”

James Smith, Research Director at the Resolution Foundation, commented on the Bank of England’s inflation challenge, stating:

“Looking ahead, then, inflation is expected to rise next month to around 4% and then to fall back gradually after that. This is inflation that is too high for BoE comfort, even if it does come with a cooling labour market and easing wage growth.”

GBP/USD Reacts to the Retail Sales Report

Reacting to the data, the GBP/USD slid from $1.35455 to a low of $1.35202. On Friday, September 19, the GBP/USD fell 0.25% to $1.35204. The pound’s pullback underscores how spending may have peaked, boosting hopes of monetary policy easing.

Looking Ahead: Will Slowing Services Growth Tip the BoE Toward November Cuts?

Investors should now turn their focus to the upcoming UK Services PMI (September 22). Economists forecast the S&P Global Services PMI to drop from 54.2 in August to 51.7 in September.

Slower service sector growth, softer services inflation, and job cuts could strengthen bets on a November BoE rate cut. Conversely, resilient service sector growth, higher prices, and rising headcounts may dampen expectations of a November policy adjustment. UK services inflation eased from 5% in July to 4.7% in August.

ING held onto its November rate cut prediction, stating:

“We still narrowly favor a November rate cut by the Bank of England, assuming there’s better news in the next set of inflation numbers.”

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