Interactive Investor

Euro 2020 stokes UK inflation fears as retail sales jump

23rd July 2021 11:57

Alex Sebastian from interactive investor

Millions of people splashing out on extra food and booze during the recent football tournament has had a big impact on the economy.

Inflationary pressure continues to build in the British economy as the Office for National Statistics (ONS) released its latest retail sales figures.

The ONS reported retail sales volumes increased by 0.5% between May and June 2021 and were up 9.5% versus pre-pandemic levels in February 2020.

Food sales volumes made the biggest impact with a rise of 4.2%, with “anecdotal evidence” suggesting this may be linked to the Euro 2020 tournament.

In contrast, non-food stores reported a fall of 1.7% in sales volumes in June 2021 when compared with the month before. Household goods sellers such as furniture stores and clothing were the main factors in this.

Petrol and diesel sales increased by 2.3% over the month as people upped the amount of travel as restrictions fell away, however they remain 2.1% below February 2020 levels.

Strong numbers at the tills indicate robust demand among consumers as the nation emerges from the pandemic with optimism, despite the lingering “third wave” of infections.

While this is of course broadly a good thing, the risk is that, combined with near-zero interest rates and quantitative easing, it will push prices up at an uncomfortable speed.

This means savers are further hammered by the value of cash being whittled away as the rates on easy access accounts are trounced by the expanding inflation number.

Inflation is already ahead of the Bank of England’s target of 2%, with last week’s update revealing a 2.5% annualised rise in prices across the economy.

There is no sign that the central bank is minded to ride to the rescue of savers anytime soon by raising interest rates from the current 0.1%.

Policymakers are sticking with the line that the price rises being seen are “transitory” and therefore immediate action on rates is not required.

It is increasingly hard to believe this claim however, and with large numbers of people expected to splash out on “staycations” across the UK over the course of the summer, we can expect more strong sales figures and price rises in the weeks and months ahead.

Also worth noting is that the latest set of Purchasing Managers Index (PMI) figures for the UK economy indicate strong growth and rising prices. PMIs measure economic activity across various sectors of the economy such as services or construction.

Readings above 50, as we are seeing now, indicate rising demand and therefore upward pressure on prices.

Debapratim De, senior economist at Deloitte, commented: “June's inflation figures provide further evidence that supply, of both raw materials and labour, is struggling to keep up with resurgent demand.

“Policymakers are pricing in a recovery that is just right - with strong growth and temporarily higher inflation. That seems likely. But it is by no means assured.”

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