UK retail sales fare worse than expected

Chris Scicluna
Emily Nicol

Japanese inflation rises to the highest since 1991 and double the BoJ’s 2% target
In line with expectations, today’s Japanese CPI figures saw the headline inflation rate rise 0.2ppt in December to 4.0%Y/Y, double the BoJ’s target, 3.5ppts higher than at the start of the year and the highest since 1991. When excluding fresh foods, of which inflation moderated 7ppts last month to 0.5%Y/Y, the BoJ’s forecast measure of core inflation rose 0.3ppt, also to 4.0%Y/Y, the highest for more than four decades. This partly reflected a further increase in non-perishable food inflation, which rose 0.6ppt to 7.4%Y/Y, the highest since 1976, to account for more than 1½ppts of headline inflation. An increase in prices of electricity (21.3%Y/Y), gas (23.3%Y/Y) and petrol (1.6%Y/Y) also saw the contribution from energy rise to 1.1ppts.

When excluding all food and energy prices, the internationally comparable measure of core inflation rose just 0.1ppt to 1.6%Y/Y, nevertheless still the highest rate since March 2015 (and since 1993 when excluding the impact of consumption tax hikes). This reflected a further uptrend in hospitality as eating out inflation rose (6.4%Y/Y) to its highest since 1981. But price pressures in Japan appear to remain largely supply-driven. And with the government’s support for household energy bills to take effect in February, and some easing of global pressures in the goods sector, inflation has now likely reached its peak. Indeed, our colleagues in Tokyo forecast core inflation to drop by almost 1½ppts in February to 2.7%Y/Y and gradually moderate below the BoJ’s 2% target in the second half of the year.

UK retail sales fare worse than expected in December to confirm sixth successive quarterly drop in Q4
With real disposable incomes down at the sharpest pace in more than fifty years, UK retail sales volumes ended last year on a very soft note, falling 1.0%M/M in December to be down in Q4 for the sixth successive quarter and by 1.0%Q/Q. The decline in December contrasted expectations of modest growth on the month, but it was no surprise that the ONS cited feedback from retailers that consumers were seeking to cut back spending in the face of affordability concerns. The drop in December left sales volumes down 5.8%Y/Y, 1.7% below the pre-pandemic level in February 2020, and more than 10% below their peak in April 2021. Within the detail, non-food store sales fell 2.1%M/M in December while food store sales fell 0.3%M/M, and sales at department stores fell 3.1%M/M. Clothing stores and household goods stores both bucked the trend, with sales up 1.0%M/M and 1.5%M/M, perhaps reflecting lower inflation in both categories. The share of total sales accounted for online declined as households were seemingly deterred by concerns about the reliability of deliveries, not least given postal strikes. Meanwhile, total sales values fell 1.2%M/M in December. But given high inflation over previous months, they were still some 13.6% above the pre-pandemic level and were also up 0.6%Q/Q in Q4.

UK consumer confidence falls at start of 2023 to underscore weak spending outlook
Looking ahead, continued declines in real incomes point to further weakness in retail sales volumes in Q1. Indeed, according to the GfK survey, consumer confidence has deteriorated at the start of 2023. Following three successive monthly improvements from September’s record low in the wake of the Truss crisis, the headline GfK index dropped 3pts in December to -45, a level that was only worse in September and October. The survey detail reported that households judged that their personal financial situation and economic conditions had deteriorated. And so, they also downgraded their assessment of the climate for making major purchases to the worst since October and a level rarely lower on the series.

German PPI inflation falls to its lowest since November 2021 as the downtrend in energy and intermediate goods prices continues
Today’s German PPI figures added to evidence that goods price pressures continue to ease, with producer prices down for a third consecutive month in December, by 0.4%M/M to be more than 8% below September’s peak. As such, the annual PPI rate dropped for the third successive month and by a further 6½ppts to 21.6%Y/Y, the lowest since November 2021. The decline was again driven by energy, with prices falling 1%M/M to leave the annual inflation rate of that component down almost 24ppts to 41.9%Y/Y, almost 100ppts below August’s peak. But intermediate goods prices also fell for the fifth month out of the past seven, down 0.4%M/M, to leave the respective annual rate down 1½ppts to a nineteen-month low of 12.3%Y/Y. While consumer goods prices rose a slightly faster 0.5%M/M in December, this was still well below the peak of 3½%M/M in April, and just half the average rate between May and October, to leave the annual rate down 0.2ppt at 17.3%Y/Y. And with surveys suggesting another notable drop in input costs in January, and wholesale gas prices having fallen to their lowest in sixteen months this month, producer goods inflation should continue to moderate in the New Year too.

US existing home sales expected to have fallen significantly further in December
In the US, today brings existing home sales figures for December. Given higher mortgage rates, subdued demand, and the uncertain economic outlook, home sales are expected to have fallen for the tenth consecutive month at the end of last year. Indeed, our colleagues forecast a drop of 2.2%M/M, taking the level to 4.00mn, below the initial pandemic trough and the lowest since 2010. 

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