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Consumer Spending Hit By Rise In Inflation

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• BRC-KPMG retail sales monitor shows biggest fall in total sales since survey began in 1995

• RICS figures show house prices outside London are continuing to fall

The British Retail Consortium blamed the fall in consumer spending on inflation and low wage growth. Photograph: John Stillwell/PA

Larry Elliott

The Guardian, Tue 12 Apr 2011 07.00 BST

Britain's retailers are enduring the toughest trading conditions for at least a decade and a half, as consumer spending wilts in the face of higher inflation and the first drop in personal spending power since the slump of the early 1980s.

Today's monthly healthcheck from the British Retail Consortium (BRC) of activity in brick and mortar stores and on the internet found an across-the-board weakness in consumer spending that left takings down on a year earlier.

City analysts are braced for fresh evidence of upward pressure on the cost of living with the release of the latest Office for National Statistics data today. Financial markets are expecting the annual inflation rate as measured by the consumer prices index to nudge closer to 5%, adding to the Bank of England's dilemma over whether to raise interest rates at a time when the economy is weak.

Stephen Robertson, director general of the BRC, said: "The next interest rate decision is a difficult balancing act for the Bank but, for now, supporting our weak economy must be the priority. Inflation is coming mainly from temporary and external price shocks – VAT, world commodity prices and the weak pound – not wage or consumer-driven increases. Increasing interest rates would do more harm than good."

The BRC data comes in the wake of profit warnings from high street names ranging from Dixons to Mothercare, Carpetright, Halfords, HMV and the Argos owner Home Retail Group. The former Asda boss Andy Bond has warned that retailers are facing a two-year high street recession as consumer confidence and household incomes come under increasing pressure.

The BRC-KPMG retail sales monitor showed that the total value of retail sales last month was 1.9% lower than in March 2010, but down 3.5% when the data was adjusted for an increase in floor space over the past 12 months.

"This is the worst drop in total sales since we first collected these figures in 1995," Robertson said. "Non-food retailers were particularly hard hit. This is strong evidence of the pressure customers and traders are under. This year's later Easter is a factor but this fall goes way beyond anything explained by that alone.

"Uncomfortably high inflation and low wage growth have produced the first year-on-year fall in disposable incomes for 30 years. Mounting fuel and utility costs, falling house prices, higher VAT and the prospect of more tax rises and job losses left people unwilling to spend unless they really had to. These pressures aren't going away and the arrival of higher national insurance is likely to compound them in the immediate future."

A sector-by-sector breakdown of trading conditions found that spending on clothing was down on a year earlier, food sales were flat, stores selling electrical goods had a "challenging" month, book sales were down and many computer games stores were disappointed by sales of the new Nintendo DSi 3D. The BRC said that online sales were also affected, with the growth rate in internet retailing halving to 7.5% between March 2010 and March 2011.

Helen Dickinson, head of retail at the accountancy firm KPMG, said: "We have seen an emergence of new, lower spending patterns since the middle of January, which are currently continuing to trend downwards. Many retailers will not be able to sustain this ongoing weakness in demand beyond the short term and are hoping for some good news around the extended bank holiday period and a feelgood factor driven by the royal wedding.

"However, as disposable income continues to fall, without reducing saving or increasing borrowing – which would oppose current trends – this will not be possible."

A separate report today from Britain's estate agents suggested little prospect of the traditional spring surge in the housing market. The Royal Institution of Chartered Surveyors (RICS) said that activity was flat, demand for new property had fallen and prices were continuing to edge downwards. Nationally, the number of firms reporting falling prices exceeded those registering price increases by a margin of 23 percentage points, slightly lower than the balance of +26% in February.

According to the RICS, the general fall in house prices over the past three months was in the range of 0-2%. London was the only part of the country to report a rise in prices, and also bucked the trend in terms of activity.

Ian Perry, RICS housing spokesman, said: "The rather negative outlook for property prices across the UK seems to better reflect the general economy than the microclimate of London. The low level of buyer interest in many parts of the UK continues to impact on the market, resulting in some downward pressure on prices. With the prospect of forthcoming interest rate rises and continued shortage of mortgage funding, it seems that overall recovery for the national housing market is still some way off."

It seems inflation is delationary and so Merv can just sit back and let it all sort it's self out.

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