Although UK consumers are pressured by rising inflation, we expect them to increase their spending this Christmastime. We expect to see the following over the November–December shopping period:
Increased shop-price inflation will buoy retail sales this Christmas season—but we anticipate meaningful real-terms sales growth, too. We expect that:
Below, we show our headline estimates for UK retail sales in November and December this year and comparable figures for 2016. Last year, shop-price inflation was much lower, but the Office for National Statistics (ONS) reported solid grocery sales growth and strong nongrocery sales growth over the festive period.
The graph below splits out our forecast by inflation versus real growth, and places this in the context of 2017 to date, per data from the ONS. As the graph indicates, British shoppers have continued to grow their retail spending in real terms this year.
We think total shop-price inflation could moderate very slightly by the holiday period as grocery inflation begins to unwind and competitive pressures prompt an easing of price rises in some nonfood categories.
Below, we note the key headwinds and tailwinds to UK retail growth this holiday season, which we discuss in more detail later in the report.
1. Spending Power Is Declining
First, the bad news, which is a story that has been documented at length in the UK media: overall price inflation has been outpacing average earnings growth. Consumer spending power has thus been eroded by the general upward trend in prices overall, which has largely been driven by the depreciation of the British pound.
However, recently, the overall inflation trend has shown a leveling off at slightly over 2.5%, and we may currently be seeing peak inflation.
2. Sustained Real-Terms Retail Growth
Despite the pressures on consumers, real-terms retail growth has proved solid in recent months, according to the ONS (although some other sources have reported softer growth). Shoppers have upped their spending to keep ahead of inflation, and they appear to have done so in part by racking up unsecured debt on loans and credit cards and by reducing the amount they save.
While shoppers may reconsider such spendthrift habits in 2018, we do not expect them to abandon these behaviors during the festive season.
3. Grocery Inflation May Be Past Its Peak
In grocery, a key nondiscretionary category, consumer prices inflation may have already peaked and be headed downward, according to the latest data from the ONS and Kantar Worldpanel. This is further borne out by data on retail input prices—i.e., the Producer Price Index (PPI). We saw a very slight decline in PPI inflation in August (latest) following a recent leveling off.
A gradual dwindling of grocery price inflation would ease some of the pressure on consumers and free up cash for them to spend on nondiscretionary categories this holiday season.
We anticipate consumers will push more of their shopping from November into December this year than they did last year, for two reasons:
We began publishing our UK holiday forecast in 2015 and our record is one of being directionally accurate:
Our estimates are rounded, weighted averages for November and December, which in the ONS Retail Sales Index comprise a total of nine weeks. We benchmark our sales estimates to the ONS’s unadjusted sales data and benchmark our shop-price inflation estimates to the ONS’s retail price deflator and Consumer Prices Index. We note that some other sources, notably the British Retail Consortium, typically report softer retail growth and lower shop-price inflation.