Belfast Telegraph

High prices keep shoppers away

Retail sales plummet as VAT hike takes toll on consumer spending

Record price rises kept consumers out of the shops last month as official figures highlighted the strain on the UK's economic recovery.

Retail sales declined 0.8% month-on-month in February after a 1.5% hike in January, the Office for National Statistics (ONS) said.

The fall was bigger than expected by economists and is likely to reflect the knock-on effect from January's spree when shoppers snapped up bargains before a rise in VAT.

Average prices on the high street rose by a record 2.4% between January and February as firms increasingly passed on the VAT hike and increases in commodity prices to consumers.

Shoppers in DIY, homewares and music stores found prices had risen by an unprecedented 5% in just a month.

Food prices were up 5.3% on a year ago after a series of monthly hikes, while the average price of non-food goods increased by a record 3% since January.

This week, the Consumer Price Index (CPI) measure of inflation rose to 4.4% in February and the Bank of England warned the rate could exceed 5% this year.

With consumer spending making up about two-thirds of the economy, analysts said the update added to recovery worries, particularly after the Office for Budget Responsibility downgraded the UK's growth forecast to 1.7% from 2.1%.

Charles Davis, an economist at the Centre for Economics and Business Research, said: "Households are being forced to retrench in the face of a higher cost of living and continued weakness in earnings growth. "While the fuel duty cut provides some help, the headwinds for the consumer remain strong, so we think consumer spending is unlikely to grow in real terms in 2011."

The squeeze on consumer spending was also underlined in trading updates from two major retailers today.

B-amp;Q owner Kingfisher said like-for-like sales in the UK and Ireland declined 3% in the year to January 29.

And fashion retailer Next reported a 4% decline in same store sales in the past year and warned it may have to put the price of its autumn ranges up by 10% as cost pressures grow.

The stark drop in sales in February suggest that January's strong sales growth was the result of pent-up demand after the Arctic weather conditions that caused retailers to suffer their worst ever month in December.

The ONS said there was downward pressure on all retailers in February, apart from those selling petrol. Department stores saw sales down 3.2% on a month ago, as consumers cut back on clothing, said ONS.

Sales at DIY, homewares and music stores were down 2.5% on January, with sales of music and video recording equipment down 12% on a year ago.

Even supermarkets and food retailers suffered a decline of 2.2% on the previous year, making February their 13th month of declining figures in a row. Internet and mail-order firms also saw month-on-month sales volumes growth slow to 17.3% in February.