UK retail sales slump as inflation and energy bills squeeze households

All main retail sectors fell in August. Photo: Mike Kemp/In Pictures via Getty Images
All main retail sectors fell in August. Photo: Mike Kemp/In Pictures via Getty

UK retail sales declined at the sharpest pace in eight months in August as consumers cut back on spending amid the cost of living crisis, heightening the risk of a recession.

The quantity of goods sold in stores and online dropped by 1.6% from July, more than three times the 0.5% fall forecast by economists, according to the Office for National Statistics (ONS).

All retail categories saw sales decline for the first time since July 2021, building on a downward trend that started around a year ago when COVID restrictions on several sectors were lifted.

Friday's slump left sales 5.4% lower than a year earlier, highlighting the pressure on household budgets as as wages fail to keep pace with soaring energy bills and the fastest inflation in decades.

Chart: Office for National Statistics
Chart: Office for National Statistics

Non-food stores’ sales volumes contracted 1.9%, with department stores registering a 2.7% drop, household goods stores were down 1.1% and clothing fell 0.6%.

Online sales and fuel declined 2.6% and 1.7% respectively. Food stores' sales slipped 0.8%.

In the quarter to August, the volume of retail sales was 1.1% below the previous three months.

"Feedback from retailers suggests that consumers are cutting back on spending because of increased prices and affordability concerns," the ONS said.

The drop in sales is likely to act as a drag on the UK economy, underscoring the challenge facing retailers heading into the key Christmas trading period.

Lynda Petherick, retail lead at Accenture, said the latest sales data will be worrying for retailers.

"With a difficult winter to come, it will come as a worry to retailers that shoppers have already reigned in their spending despite the hot summer," Petherick said.

Read more: John Lewis reports £99m loss ahead of Christmas quarter

"The sombre atmosphere in the UK this week and news of slow economic growth will be adding to the sense of concern among retailers as the weather gets colder."

The Bank of England will have to raise interest rates further next week as recession looms, Olivia Cross, assistant economist at Capital Economics, predicted.

She said: "Retail sales will probably continue to struggle as the cost of living crisis hits harder in the coming months. But nonetheless the Bank of England will still have to raise interest rates aggressively.

"We now expect that the recession will be smaller and shorter than we did before, which is one reason why we expect that the Bank of England will need to raise interest rates further than we had been expecting to a peak of 4%."

The pound (GBPUSD=X), which has been one of the worst performing major currencies this year, fell 0.8% to $1.137 against the dollar in the aftermath of the release, near to its lowest level since 1985.

Watch: What is a recession and how do we spot one?