High temperatures and reduced promotions weaken shopping willingness! UK retail sales declined in July; economic gloom and resurging inflation exacerbate Bank of England's policy dilemma

According to Zhitong Finance APP, due to scorching weather and reduced discount promotions weakening consumer shopping intentions, UK retail sales fell for the first time since April, ending the recent rebound in consumer spending. The UK Office for National Statistics stated on Friday that seasonally adjusted retail sales in July fell 0.5% month-on-month, in line with economists' expectations, while the June retail sales growth was revised down to 0.7% month-on-month.

UK retail sales lost growth momentum in July

Reportedly, sales at UK non-food stores and online retailers both declined in July, as some promotional activities were held earlier than usual, prompting consumers to move purchases that were originally planned for July forward to June. The Office for National Statistics noted that non-food sales fell by 1.3% in July, with clothing shops seeing the largest drop. The extent of promotional discounts on clothing was also lower than is normal at this time of year.

High temperatures in July dragged down clothing sales in the UK

Sales at home goods and department stores also declined, with retailers attributing this to hot weather and inventory shortages. Meanwhile, online sales dropped after promotional activities ended in June. However, food stores saw growth, with retailers pointing to the World Cup as a driver of related sales.

Consumers reduced shopping trips to stores to avoid the extreme heat. Data from the UK Met Office showed that England experienced its driest July since records began in 1836, while average temperatures across the UK in July were more than 2 degrees Celsius above normal.

A previous report released by the British Retail Consortium indicated that UK retail sales in July were up just 1.3% year-on-year—only half the rate of a year ago, and lower than the average level for the past 12 months. Retailers said consumers were more inclined to buy smaller indulgence items and to postpone large purchases such as furniture or electronics.

This summer, sunny weather, the football World Cup, and statements by Prime Minister Andy Burnham addressing the cost of living helped boost consumer confidence. A survey by GfK, released overnight, showed that British consumer optimism had reached its highest level since August 2024.

However, slowing wage growth, rising energy bills, and the risk that US President Trump’s war against Iran could trigger broader inflationary shocks may overshadow this boost to sentiment. The confidence boost from Burnham’s early weeks in office may also be only temporary, as he will face tough policy choices when he presents his first budget this autumn.

Sandra Prince, head of consumer banking at Lloyds Bank, said: "After much of the UK experienced a prolonged period of hot weather, many households may have already bought what they need for the season, and the sales cycle for popular summer goods is now ending. The World Cup’s lift to spending ended in the first half of July, meaning retailers had fewer opportunities to boost sales through warm-weather promotions."

The decline in retail sales further indicates that the recent positive momentum in the UK economy may be coming to an end. Data released earlier this week showed that with rising domestic and international uncertainties, the UK labour market continues to be weak—demand for workers remains subdued, and wage growth has slowed to its lowest in nearly six years.

The data shows that in July, the number of UK corporate employees fell by 13,000, following a similar decline the previous month; from May to July, the number of UK job vacancies further fell to 707,000, the lowest level since 2021. Meanwhile, the Bank of England’s closely watched measure of private sector wage growth excluding bonuses slowed to 2.8% in the second quarter, also the lowest in nearly six years. Ashley Webb, Chief UK Economist at Capital Economics, noted that all these factors together paint a picture of a weak labour market, and this cooling trend continues.

At the same time, UK inflation rose in July for the first time in four months, reaching 2.9%, the highest since March this year. This figure was broadly in line with the median forecast by economists, slightly higher than the Bank of England’s previous projection of 2.8%, but the formal reversal of the disinflation trend casts a shadow over the UK’s economic outlook.

Energy bills were the main driver of the overall inflation rebound in July, directly reflecting Ofgem’s quarterly price cap adjustment that took effect July 1—raising the cap on household gas and electricity bills by 13%, with the average annual bill rising by about £221 to £1,862 per household. Specifically, natural gas prices jumped 14.7% month-on-month in July, the largest single-month increase since October 2022; electricity prices also rose by 3.6%.

However, inflationary pressure did not spread to the broader economy. Core CPI excluding energy, food, alcohol, and tobacco remained at 2.6% year-on-year for the third consecutive month. This reading is slightly above economists’ forecast of 2.5%, but does not alter the basic trend of core inflation stabilizing.

More reassuring for the Bank of England was the unexpected cooling of service sector inflation. As the most important indicator of domestic economic pressure, services inflation fell from 3.6% in June to 3.4%. This was mainly due to the increase in airfares in July this year (+11.7%) being much lower than in the same period last year (+30.2%); including housing costs, the CPIH indicator (the priority inflation metric for the Office for National Statistics) rose from 2.8% to 3.1%.

The Bank of England, which is facing a policy trade-off between weak demand and inflationary pressures, is closely monitoring UK consumer spending. So far, the weak job market has reduced the risk of second-round effects from inflation. However, the Bank of England expects that, as the impact of the Middle East war gradually transmits through the economy, price increases will accelerate further in the coming months.

The Bank of England kept its benchmark rate unchanged at 3.75% at the end of July. Policymakers continue to keep policy options open, maintaining guidance that the committee is “ready to act at any time” to prevent persistent high inflation, while trying to manage volatile energy prices in recent weeks.

However, the Bank of England’s Monetary Policy Committee stated that signs of easing domestic inflationary pressures are "very clear", and so far there is “almost no evidence” that energy shocks have pushed up wage demands or prices elsewhere. Most committee members who supported keeping rates unchanged also said that if the war ends soon, their policy stance could change; two members, including Deputy Governor Dave Ramsden, said they would consider cutting rates in that scenario.

Weakness in the labour market, easing domestic price pressures, and softer retail sales offer the Bank of England’s Monetary Policy Committee some time to assess the impact of the war on the UK economy. However, continued tensions in the Middle East could keep oil prices elevated, which appears likely to exacerbate domestic price pressures and make it harder for the Bank of England to strike a balance between curbing inflation and stabilizing economic growth.