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Retail sales - benevolent deflation is coming to an end

The ONS this morning released data showing retail sales volumes rose by 4.1% year on year in September, with the amount UK shoppers spent at the tills rising by 2.9% compared to September of last year.

Store prices fell by 1.1% over this period, which was the smallest decrease since 2014, which shows the deflationary trend is abating, and may indeed be starting to turn.

Clothing sales fell sharply however, with 5.4% lower volumes than last year, most likely down to good weather in September delaying consumers’ appetite for autumn clothing ranges.

Prices in the clothing sector bucked the overall trend in September though, rising by 0.4% year on year. This isn’t big enough to be a deal-breaker for shoppers, but is probably the thin end of the wedge as weaker sterling feeds through into higher prices.

Meanwhile the shift to online shopping continues apace, with the amount spent via this channel rising by 22% year on year. The amount spent online now accounts for 15% of overall retail sales.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

"Today’s retail sales show consumers are still willing to go out and spend their pennies, though looking forward the benevolent deflation we have seen of late is probably coming to an end for shoppers, thanks to weaker sterling.

In particular September’s rise in clothing prices is likely to be the start of a trend, as currency hedges and supply agreements come up for renewal.

The clothing chain Next, for instance, buys around two thirds of its merchandise in dollars, and so expects store prices to increase by 5% in the coming year; a forecast the company made before the most recent lurch down in sterling.

Competitive pressure will only partially protect consumers from price rises, which will act as a brake on consumer’s shopping habits, unless there is a substantial pick up in wage growth.

Meanwhile the rapid increase in internet sales shows the importance for retailers of having a strong online presence. Online sales now make up 15% of all retail spending, though less than 5% of food retailing, which suggests this channel has scope to grow. This fact won’t be lost on the supermarkets, or indeed Amazon, who are currently trialling their own grocery delivery service in selected postcodes in London."


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