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Is the jump in retail sales merely an illusion?

The volume of retail sales rose by 1.9% in January compared to the previous month, according to the Office for National Statistics (ONS). This was after the December figure was revised downwards from an earlier estimate of a fall of 0.8% to a corrected figure of minus 1.4%. This was the biggest December fall since records began.

When we examine the figures on a year-on-year basis, sales volumes rose 5.3% in January, which was the largest jump for six years. The figures were generally better than most analysts had anticipated.

The increase in retail sales looks like a 'false dawn'

But, the figures were undoubtedly distorted. As the ONS said: “The monthly pattern of retail sales has been affected by the extremely bad weather in both January 2010 and December 2010, and changes to the VAT rate in both years.”

In fact, VAT rose from its temporary low of 15% to 17.5% on 1st January 2010 and again from 17.5% to 20% on 4 January 2011. It seems that not only were consumers coming out to shop after the ice and snow had disappeared, but they were driven in early January to spend before the rise in VAT. When we look at the sales figures over a longer period they only rose by 0.2% in the November to January quarter, compared to the previous quarter.

So, will consumption expenditure be a driving force for the economy this year? Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club was quoted as saying: “Spending power is under huge pressure from high inflation and weak earnings, while confidence is very weak and households remain heavily indebted. January could well represent the high watermark for retailers in what is likely to be a very difficult year.”

When we add in the fears of redundancy, especially in the public sector, and the soaring price of petrol, which rose again today in the face of concerns about Libyan oil supply, together with the possibility of interest rate rises later in the year, then the prospects are not good.

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Posted in Consumer Expenditure, Retailing

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