My theory that higher inflation leads to lower UK Retail Sales works again

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by Shaun Richards

There is a lot going on in economies right now but it is always nice when one of your theories works again. Back on the 29th of January 2015 I pointed out this.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

So lower inflation was accompanied by strong retail sales which is rather ominous right now as earlier this we inflation was reported at 4.8% via the RPI or if you prefer to ignore owner-occupied housing 3.2% via the CPI. So what about retail sales?

Retail sales volumes fell by 0.9% in August 2021, following a 2.8% fall in July

So they have stumbled as inflation gas picked up and we look at a specific number for that too.

reflecting an annual retail sales implied price deflator of 3.3%.

The push has come recently as we see monthly rises of 1% in May,0.7% in June -0.4% in July and 0.9% in August. So even with a curious July number that is quite a push and look what has happened.

The Breakdown

Here there was some solace because there is something of a switch between categories going on.

Food store sales volumes fell by 1.2% in August 2021, following a fall of 2.0% in the previous month after an increase of 4.0% in June thanks to the start of the Euro 2020 football championship. This monthly fall in food sales volume may be associated with an increase in social spending (such as eating out) linked to the further lifting of hospitality restrictions since July. This is supported by data from Open Table, which showed a pickup in online restaurant reservations in August.

As you can see there was a distortion from the Euros football but there is a bigger one as people return to eating out. Or as @forexflow put it earlier when asking me about this.

Not being able to get a table at my local curry hut unless I book a week in advance supports my theory too mate.

This is reinforced by another part of the official release.

This pattern is also in line with data on UK spending on debit and credit cards, based on CHAPS payments made by credit and debit card payment processors, which reported a fall in spending on staples (such as food) in August alongside an increase in social spending (such as eating out and takeaways).

So business was pushed into retail sales via the lockdowns and is now being taken away. Although not entirely as perhaps they found treats they liked and still have them.

Despite the monthly fall, food store sales volumes are still 3.4% above pre-coronavirus (COVID-19) pandemic levels in February 2020.

Department Stores

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These have been in trouble for some years as we have observed via the decline of the high street. The pandemic seems to have made this even worse.

Department stores reported a fall of 3.7% in monthly sales volumes in August 2021, following falls each month since April 2021. Department store sales volumes were 5.2% below their pre-coronavirus pandemic February 2020 levels.

There is a supply chain story here and the emphasis is mine.

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Across businesses in the retail industry, 6.5% reported they were not able to get the materials, goods or services needed from within the UK in the last two weeks. This compares with 7.1% across all industries. Department stores reported the largest percentage at 18.2%, followed by clothing stores at 11.1%.

This was backed up by the inflation data earlier this week where the furniture category rose by 1.3% in August. So the shortages are raising prices as well as reducing volumes. Other businesses had troubles but were able to duck and dive around them.

Another 8.9% of businesses in the retail industry reported they were able to get the materials, goods or services they needed from within the UK in the last two weeks, but had to change suppliers or find alternative solutions. Over 22% of food stores reported this, followed by 18.8% of fuel stores and 11.1% of clothing stores.

Other stores saw a dip but a smaller one and are still higher than pre pandemic.

Other non-food stores (such as chemists, toy stores and sports equipment stores) reported a monthly fall in sales volumes of 1.2% in August 2021. Despite this, sales volumes were 3.0% higher than this time last year and 4.5% above their pre-coronavirus pandemic levels.

If you are looking for growth then maybe we were a bit better dressed.

sales volumes for clothing stores were the only sector to show an increase over the month, at 0.7%.


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This maybe gives us a hint of the broader economy.

Automotive fuel sales volumes rose by 1.5% in August 2021 as people continued to increase their amount of travel; however, they remained 1.2% below their pre-pandemic February 2020 levels.

So an improvement but the overall picture may be worse than shown because some seem to have switched away from public transport. There is an irony here as it will receive a boost in Battersea on Monday when the 2 new Tube stations open ( yes we will have a Battersea Power Station station), something people have been asking to happen for decades. Just in time for public transport to decline.

In total, there were 3.59m entries and exits compared to the pre-pandemic baseline of 7.12m. It was the first time that the Tube has seen 50 per cent of ridership on a Monday since March 2020. ( City-AM ).


This seems to be on the march again. It may be related to the supply shortages as people do their own searches for goods not in the local shops.

The proportion of retail sales online rose to 27.7% in August 2021 from 27.1% in July, substantially higher than the 19.7% in February 2020 before the pandemic.


The numbers have been depressed by the inflation surge in the UK and in fact have fallen for the last four months in an almost perfect demonstration of that. However we live in complex times where a lot is happening at once and the numbers have been depressed both by a category switch ( restaurants etc reopening) as well as the supply shortages. The latter seems set to continue as I note it has spread to truck production in the US so not only are drivers in short supply it may spread to the trucks as well. Car sales too will be a depressing factor although offset somewhat by used car sales. So overall here we are.

 however, volumes were up by 0.3% in the three months to August compared with the previous three months, and in August 2021 were 4.6% higher than their pre-coronavirus (COVID-19) pandemic February 2020 levels.

The recent declines link though to my view on the Bank of England.

The Bank of England is now expected to raise rates in May 2022, according to Goldman Sachs. Expects the BOE will hike bank rates to 1% by the fourth quarter of 2023. ( @PriapusIQ)

I think Goldman Sachs have a position they want to get out of……


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