Economic Monitor: Inflation begins to ease
Encouragingly, inflation eased in last month, from 8.7% to 7.9%, although it is expected to be more than double the 2% target rate by the end of 2023. The softening in inflation was enough for the Bank of England to opt for a 25 basis point interest rate rise, with the Bank Rate now at 5.25% - its highest rate since February 2008.
Retail sales have held up well this year so far, despite higher interest rates and high input costs. However, strong wage pressures are forcing input costs to remain elevated, which is also feeding into historically high inflation in the service sector. Despite a slow fall in inflation over the next 6 months, strong wage settlements suggest real household incomes will begin to recover in the second half of this year.
The economic situation makes for a challenging trading environment for retailers. With interest rates expected to be higher for longer, making borrowing for businesses and households more expensive, financial stress on businesses and consumers (especially those that are overleveraged) will increase. In Q2 2023, retail insolvencies increased by 16% year on year - a trend that is expected to continue. We expect economic growth to be broadly flat over the next 12 months, and the risk remains of persistent inflation domestically as well as from global commodity price volatility, particularly following the end of the Black Sea Grain Initiative.Harvir Dhillon, Economist at the British Retail Consortium