GBP/JPY – Pulls Off Highs as UK Retail Sales Plunge in December

• A poor December for UK retailers
• Is weaker demand a good thing for the BoE?
• GBP/JPY eases off eight-year highs

UK retail sales fell sharply in December as consumers tightened their pursestrings during what is normally a hugely important time of year for retailers.

Any sense of optimism from the jump in sales in November was short-lived, with the decline in sales last month as widespread as it was steep. Everyone from food retailers to department stores saw a sharp reduction in sales as consumers spent less on gifts and, as it turns out, food during the festive season.

While real household incomes are rising once more, the last two years have clearly taken a significant toll and it would appear many are not yet feeling better off as a result of inflation falling below wage growth.

Some of that may be psychological after two years of seeing bills and prices rising so much compared with incomes but there will also be plenty whose incomes are still being squeezed or who have savings buffers that need rebuilding and debt repaying.

Then there’s the evidence we’re continuing to see in the aftermath of lockdowns that people are more inclined to spend on experiences than they are goods which has perhaps lasted longer than expected.

Either way, the question that Bank of England policymakers will be asking themselves is what this all means for the economy and the inflationary environment. While problematic for retailers, less demand could help the central bank in its mission to get inflation back to 2% and, as a result, cut interest rates sooner than it would currently admit.