The standard analysis of the outlook for the UK economy over the next few years incorporates a view that growth will disappoint, in part, because consumer spending will be weak. Consumers will retrench, so the argument goes, because they have taken on too much debt in the past and are now seeking to pay it off.
But the latest retail sales data, published today by the Office for National Statistics, do not show any signs of consumer retrenchment. Quite the opposite, with retail sales volumes up 0.9 per cent in January after a 0.6 per cent increase in December.
What is most noteworthy, though, is not sales volumes over the last couple of months, but sales values over the last three years.
Taking the latest three months (to smooth out month-to-month fluctuations), sales values are 4.9 per cent higher than a year ago and have increased at an annual rate of 4.1 per cent over the last three years. This compares with an annual rate of increase of 3.6 per cent between 1997 and 2007. Sales values are growing faster now, when households are supposed to be retrenching, than they were during the period when households were being profligate and taking on lots of additional debt.
The difference is that there was no inflation on the high street between 1997 and 2007. An increase in sales values of 3.6 per cent a year equated to a 3.5 per cent increase in sales volumes. Over the last three years, inflation has averaged 3.2 per cent, so an annual increase in sales values of 4.1 per cent led an increase of just 0.8 per cent in volume terms.
But inflation has fallen recently. In the last four months, high street prices have increased by just 0.3 per cent. If it remains low, and sales values continue to increase at their recent rate, the growth in sales volumes will pick up accordingly. A combination of a 4 per cent increase in sales values, 1.5 per cent inflation and a 2.5 per cent increase in sales volumes at the end of 2012 is quite plausible.
Of course, much could go wrong to throw this projection off…