The economic news this quarter has been rather confused, particularly as it applies to the retail economy. Consumer confidence, as measured by the GfK index, continues to oscillate around the zero mark, well above its long-term trend. However, pay growth remains weak with average earnings only rising by 0.7% in the year to August.

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The most recent economic debate has focused on inflation, both in terms of the price of goods and labour. Annual CPI inflation fell to a five year low of 1.2% in September, nearly a third lower than predicted in the MPC's August report. This fall was partly driven by a drop in petrol and food prices, but core CPI inflation (which excludes food and fuel) also fell by 0.4 percentage points.

The forward trend looks unlikely to change this, with heavy competition in food retailing and a falling oil price likely to keep inflation low.

Of course low inflation is in some ways good for the consumer, if not the retailer, and a continuing theme of these reports has been a wish for the moment that earnings growth exceeds CPI. However, while employment levels are indicating that wage inflation should be accelerating, this is not yet the case. Average real earnings growth is continuing to fall, which is bad news for the retail economy in terms of consumer's propensity to spend, as well as being bad news for the wider economy because it means that income tax receipts will be lower than expected.

The one upside for retailers is probably the read-through to productivity, which is now rising at a faster than average rate. This means that unit labour costs will fall and enable employers to support profit margins without having to put prices up. Furthermore, the low level of inflation means that there is very little need for the MPC to raise interest rates soon or fast. Given the relatively high levels of household debt out there, the longer these rises are delayed the better it will be for UK retailing.

While retail sales volumes fell by 0.3% in September (their weakest performance since January), much of this seems to have been due to the warm autumn leading to poor sales of winter clothing (clothing and footwear sales were down 7.8% month on month). Despite this, we expect Christmas 2014 will be strong for retailers across most sectors, indeed, we are expecting that it will be the strongest Christmas period since the start of the Global Financial Crisis.

Taken from
UK Shopping Centre and High Street Bulletin Q3 2014