Consumer spending slows but trend still upwards

The release – the first UK economic indicator in a while to come in below forecasts – pushed an otherwise strong pound to a session low and lifted Government bonds.

But analysts were reluctant to read too much into a volatile data series and noted the underlying trend remained positive.

Separate figures showing a 16 per cent rise in car manufacturing in August also provided a counterpoint.

Retail sales volumes fell 0.9 per cent on the month, wrongfooting economists who had expected a rise of 0.4 per cent.

The annual rate of growth slowed to 2.1 per cent from July’s two-and-a-half-year high of 3 per cent.

“It’s a disappointing outcome that has taken the wind out of the sails of sterling for now, but the underlying story still looks good,” said James Knightley, UK economist at ING.

The biggest drag came from food store sales which slumped 2.7 per cent in the month of August, fully reversing the previous month’s gain.

July’s figure was boosted by unusually hot weather which encouraged spending on barbecue food and outdoor items.

A Royal baby and string of national sporting successes provided an additional reason to splash out.

David Tinsley, UK economist at BNP Paribas, said yesterday’s sales release was a useful reminder that economic data would not soar inexorably upwards.

“It’s not going to be a one-way progression,” he said. “But the picture of underlying improvement remains intact.”

On a three-month on three-month measure, a more reliable indicator of trend, sales volumes rose a healthy 1.7 per cent. The retail sector accounts for just under 6 per cent of the economy.

Rising house prices, record low mortgage interest rates and signs of economic recovery have given consumer spending a boost in recent months, prompting the Bank of England to revise up its prediction for third-quarter growth this week to 0.7 per cent from 0.5 per cent forecast just a month ago.

Governor Mark Carney reassured households and businesses that interest rates will not be rising any time soon, potentially encouraging more spending.

But with inflation continuing to outstrip wage growth, economists question whether the improvement in the consumer mood seen since the start of the year will be sustainable.

Retailers Morrisons and Next have sounded a cautious note on the prospects for recovery.