UK Retail Sales exceed forecasts as consumers stir

U.K. retail sales rose in August at their fastest pace in four months, providing further evidence of a tentative pickup in consumer spending.

The quantity of goods sold in stores and online increased 1 % from July, as did sales excluding auto fuel, the Office for National Statistics said Wednesday. The increase far exceeded the median forecast of economists and marked the first run of three consecutive gains since 2015.

The figures signal some improvement in consumer demand after faster inflation helped to crimp spending earlier in the year, though volatility in the numbers means they may need to be interpreted with caution. The Bank of England said in a report on Wednesday that consumers have changed their behaviour this year, cutting back on gym memberships and buying cheaper brands.

Sales in August were driven by spending on items such as watches and jewelry, a possible result of the weak pound attracting overseas buyers. There were also gains for floor coverings and dispensing chemists. Sales at department stores rose by 1.1 percent and non-store sales jumped 5 percent as consumers felt confident enough to spend more on non-essential goods.

The pound rose after the stronger-than-forecast retail data, though it subsequently pared its advance.

Retailers are among the best-performing U.K. shares this month as brighter outlooks emerged from stores including Next Plc, JD Sports Fashion Plc and Primark owner Associated British Foods Plc. The FTSE 350 General Retailers Index is up 1.5 percent on the day, taking its gain since August to almost 7 %.

According to James Smith, an economist at ING in London, a key question is what’s driving any improvement in spending, particularly as real wages are still falling and consumer credit is rising at a near 10 % pace.

“While it could be that household income squeeze has peaked, inflation is still outpacing wage growth,” he said. If borrowing is driving spending growth, “that doesn’t make for a sustainable pickup.”

The figures may fuel speculation that the Bank of England is approaching its first interest-rate increase in more than a decade. A majority of rate setters, including Governor Mark Carney, now believe policy will need to be tightened in the coming months, as they increasingly fret about inflation pressures. That partly relates to a weaker currency, but also a reduction in the economy’s potential, which raises the risk of overheating.

There were some signs of weakness in the retail numbers as sales of clothing, footwear and household goods fell on the month. That’s probably because the pound’s drop has lifted import costs, with average store prices jumping 3.2 percent in August from a year earlier.

Retail sales are likely to contribute to growth in the third quarter. Sales will grow unless September sees a decline of at least 2.9 %. A fall of that magnitude was last recorded in January 2010.