Low UK retail sales are a result of soaring prices

UK shoppers avoid retail stores as costs soar...

April 27, 2023
Low UK retail sales are a result of soaring prices
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Matt Crabtree

Written By

Matt Crabtree

  • Sales at Britain's stores dropped 0.9% in March, and 1.0% when gasoline was excluded. 
  • This is in contrast to a 3.1% decline from the previous year. 
  • Also of relevance is the fact that the retail sales index, which crested in April 2021 and has fallen 9.5% since then, continues its downward path with this recent drop.

There was optimism that spending had flattened out at the beginning of this year, but the most recent statistics have put doubt on that assumption. 

Optimism drops as shopper habits shift

A rise in point-of-sale demand is the most obvious explanation for March's high inflation rates. But the reverse seems to be happening. Increases in prices are less the consequence of excessive demand and more the effect of manufacturers and merchants passing on greater costs to consumers.

Therefore, the British are choosing economic security. Being a wealthy nation, they can afford to be thrifty when it comes to luxuries. Weak retail sales have the beneficial consequence of discouraging inflation, which in turn reduces the need for the central bank to raise interest rates.

On the other hand, this kind of shopper behaviour might easily set off a snowball effect of price and cost reductions that would be detrimental to the economy.

This shopping and trend-following behaviour may indicate that consumers are shifting their focus from flashy purchases to more practical ones. Such buying habits, together with the aggressive use of tariff warfare and the fragmentation of the global economy (also a characteristic of the era), played a role in the Great Depression that followed World War I.

Flashiness gives way to frugality

With the GBP and other currencies flagging, the global economy is like a room full of kids and their toys (and dirty diapers), it’s time to clean up.

There are also some unexpected results, such as the plunge of the 1-month yield by 55 basis points to 3.40 percent at yesterday's closing, suggesting a frantic purchasing frenzy in the short end. According to WolfStreet, this caused the 1-month to drop by 134 basis points (bp) since March 31. 

The two-month rate “behaved beautifully, flashed a broad grin throughout the day, inched up 1 basis point to 5.04%, and climbed 25 basis points since March 31,” the article continues.

The 164-basis-point gap between the one-month return and the two-month return shows that investors are in a state of panic and buying everything they think they will be able to sell for a profit in approximately a month.

It is likely that the panicked investors bought into the 1-month bill because of the mixed bag of dismal economic statistics. As was previously said, the financial markets are unanimous that a recession is imminent.

Midway through the year is when the Conference Board says it will start, and other indicators like the Philadelphia Federal Reserve's index and inverted yield curves also point in that direction. 

The market for real estate is there already. When there is little to no reason to be pessimistic about the future, Bloomberg's headlines are consistently negative and dismal.

As proof, crude oil prices have plummeted to their lowest point since March 12. However, oil dealers are known for being overly reactive and panicked.

This is a strange economy

Investors continue to favour gold as other bulwarks sink. That is to say, despite daily headlines of this firm or that industry laying off people, a recession is likely to hit at the same time we see a severe lack of available workers. This is a strange economy, as Goolsbee of the Chicago Fed has noted.

However, inflation has been stubborn, and the Fed has not shown any signs that the 2% objective will be fulfilled in the near future, so “higher for longer” is not a dead duck.

CME Fed Watch indicates that just 6.5% of users anticipate the rate to be between 5.5 and 5.25% by the December 13 meeting (the level we forecast following the May rise, which is currently only 11 days away).

It is chaotic, full of people shoving and pulling each other, and very loud. Some more tightening may be required to ensure policies remain stringent enough to meet both aspects of our dual mission, Philadelphia Fed President Harker reportedly stated in a speech delivered yesterday at Wharton, which Reuters claims was solid standard orthodoxy.

Assuming we get there this year, we will keep rates steady and let monetary policy take effect.

The economy is doing well, according to Harker, and inflation is declining, although slowly. He anticipates inflation of 3%–3.5% this year and 2% by 2025, which is a significant decrease from last year’s 5% yearly increase in the PCE price index.

According to Harker, the current unemployment rate of 3.5% could rise to roughly 4.4% this year, during a time of moderate growth. The head of the bank also warned that the financial sector problems of the last month might slow the economy, but that “the full extent is still unclear”.

That the market (represented by the Conference Board index and yields) is racing headfirst into the Federal Reserve is confirmed, and it could not be more traditional or on message (Waller, Mester, Bullard).

It may take the Fed some time to catch on to what the market is saying, according to some experts. We would like to think the Federal Reserve, which is really just a Boy Scout group, is dedicated to its holy grail duty to control inflation, regardless of how soft or harsh the landing may be. But the signs of a recession are mounting.


The forecast for interest rates seems to be the reason why the dollar's consolidation, which might have turned into a genuine rally, is coming to an end. In May, the Fed is only likely to make one more 25 bp move, but the BOE and ECB might each make as much as 75 bp.

According to Fed funds futures, the Fed will be considering rate reduction just when the increases begin having an impact on individual economies. 

Strangely, this forecast provides support for the US stock market: stay invested through May and do not sell and leave the market because you will be back in a hurry. The MACD (a leading signal of a downward correction) may be pointing down at the moment, but the trend as a whole is not very negative.

This is a condensation of the much longer (about 10 pages) “The Rockefeller Morning Briefing”. For almost twenty-five years, The Briefing has been sent daily, providing readers with the benefit of expert analysis and perspective.

The report is meant to provide context and is not meant to advise foreign exchange trading. Rockefeller also provides traders with a variety of additional information (spot and futures).

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