This article is more than 2 years old

This article is more than 2 years old

January was a tough month for high street retailers as sales rose just 0.1%, far below City expectations, as higher prices continued to deter shoppers from spending.

City analysts had expected a recovery of around 0.5% last month, after the unexpectedly sharp fall of 1.4% in December. The figures from the Office for National Statistics (ONS) indicate a pick up in year-on-year growth to 1.6% in January, from 1.5% in December, but analysts had hoped for a bigger turnaround after a very disappointing end to last year.



Food sales fell again – down 0.9% in volume terms on December – but that was offset by a rise in sales of gym kit and children’s toys.

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Rhian Murphy, ONS senior statistician, said: “Retail sales growth was broadly flat at the beginning of the new year with the longer-term picture showing a continued slowdown in the sector. This can partly be attributed to a background of generally rising prices.”

She said there had been a 0.9% decline in the volume of food compared with January 2017 while non-food rose 2.6%, led by sports equipment, games and toys. An uplift in sales of gym kit as consumers resolved to get fit and lose weight contributed to a year-on-year rise.

It was the sixth consecutive month of decline in the volume of food sold.

Jeremy Cook, chief economist at WorldFirst, said: “Who’d be a retailer right now? The ONS sees the longer-term picture for the retail sector as in a “continued slowdown and the average British consumer is looking at real wage declines, higher borrowing costs, and record levels of consumer debt.”

Keith Richardson, managing director of the retail sector at Lloyds Bank Commercial Banking, said: “Consumers were already tightening their belts at the end of 2017 by bringing most of their Christmas shopping forward to Black Friday to make the most of the sales. Now it looks like they’ve started 2018 in cautious mood with subdued spending.”

Retailers are suffering as households have seen their spending power squeezed by rising inflation as a result of the drop in the value of the pound following the Brexit vote. The rising cost of goods has outstripped wage inflation despite high levels of employment.

Q&A What is inflation and why does it matter? Show Hide Inflation is when prices rise. Deflation is the opposite – price decreases over time – but inflation is far more common. If inflation is 10%, then a £50 pair of shoes will cost £55 in a year's time and £60.50 a year after that. Inflation eats away at the value of wages and savings – if you earn 10% on your savings but inflation is 10%, the real rate of interest on your pot is actually 0%. A relatively new phenomenon, inflation has become a real worry for governments since the 1960s. As a rule of thumb, times of high inflation are good for borrowers and bad for investors. Mortgages are a good example of how borrowing can be advantageous – annual inflation of 10% over seven years halves the real value of a mortgage. On the other hand, pensioners, who depend on a fixed income, watch the value of their assets erode. The government's preferred measure of inflation, and the one the Bank of England takes into account when setting interest rates, is the consumer price index (CPI). The retail prices index (RPI) is often used in wage negotiations.

Economists are expecting inflation to ease towards the second half of this year but official data earlier this week showed it remained high at 3% in January, just off November’s near six-year high of 3.1%.

The official figures on sales volumes tell a different story to retailers’ sales figures. Food price inflation has driven a pick-up in the value of sales at the major grocers with sales rising 3.4% in the three months to the end of January compared to the same period a year before according to analysts Kantar Worldpanel.



In contrast, non-food retailers are being squeezed by lacklustre demand and rising costs. The pressure is driving major chains including Debenhams, New Look and House of Fraser to consider closing stores while some weaker chains including furniture retailers Warren Evans, MultiYork and Feather & Black have called in administrators. Toys R Us is also facing financial difficulties as it plans to close stores under an insolvency deal.



The British Retail Consortium’s Rachel Lund said the ONS figures represent “what is likely to become the norm” over the coming year.

Shoes, sweets, and soap: ONS reveals how teens spend their cash Read more

“The fact is that consumers’ incomes simply aren’t increasing fast enough to support levels of sales growth that we’d become used to. Last year, households were able to dip into reserves to support purchasing levels, despite the pressures on household incomes.

“However with household saving rates reaching new lows, that is no longer an option, so we’re likely to see sales move much more closely in line with earnings.



“All of this signals another challenging year for retailers. With greater competition for households’ increasingly precious discretionary spending, retailers will have to be savvier than ever in offering great products and great value to consumers.”

