Shoppers may feel more upbeat, but spending is still shy

The Herald Scotland

2 days ago

Inflation has fallen markedly since those heady inflationary days in late 2022. Real wages have been growing for the past two years, whilst prices on shop shelves have actually being falling since August.
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Yet households continue to spend selectively - cutting back on non-essential items, trading down to cheaper products, with those who can afford to putting more into savings. Where consumers have opened their purses and wallets it's often been on experiences rather than in shops, such as on eating out or holidays.
Better news for retailers came in our latest Consumer Sentiment Monitor which showed shoppers' confidence nudging up over recent months in tandem with the general pick-up in the UK economy, and as some of the US-China trade tensions began to cool. However, despite the welcome prospect of a possible détente in the global tariffs dispute domestic consumer confidence – and people's propensity to spend – remains below levels seen last year.
The uptick can be seen in our retail sales data. Bolstered by the timing of Easter and better weather, retail sales in Scotland last month recorded their best performance in almost two years, positive news after a lengthy period of decidedly tepid sales growth.
However, whether this better news will be short-lived or sustained remains to be seen.
A key concern is overall inflation, at least in the near-term. Last month it rose to 3.5%, its highest level in a year and the jury's out on whether rising inflation has crested. If it sticks at about this level then it will reduce shoppers' spending power.
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Unfortunately, it is little surprise that inflation is once again rearing its head.
After all, retailers and their suppliers have been thwacked by enormous hikes in employers' national insurance contributions and the national living wage. This will cost UK retailers alone £5 billion this year.
On top of that a further £2bn of additional outlays is expected later this year as retailers implement the new extended producer responsibility packaging tax. The sheer weight of costs bearing down on the sector and its supply chain is proving impossible to fully absorb.
With statutory costs continuing to rise for retailers, households may well have to brace for stickier elevated levels of inflation. Food prices in shops have risen to their highest level in twelve months, and are forecast to reach 5% towards the end of the year.
Higher inflation isn't the only strain facing household finances. Wage rises too are likely to be tempered by the substantial additional costs employers face. Meanwhile, council taxes across Scotland leapt by 9.6% on average this April, taking a £280 million bite out of disposable incomes. Water and sewerage bills were hiked by 9.9%.
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There are other risks on the horizon. Scottish Ministers are exploring with councils the creation of more revenue generating powers, as well as wealth taxes.
Presumably this would be on top of councils' existing ability to introduce workplace parking levies. Some councils are reportedly looking at congestion charging, whilst UK Ministers are said to be debating what tax increases could be implemented in this autumn's Budget.
That said, governments have acted to help reduce the pressure on consumers. Recent trade deals with the EU and others should assist, as will Holyrood's decisions to abolish peak rail fares and pause plans for a levy on disposable cups. Scottish Ministers have pledged no further rises in income tax rates before next year's election, and no more divergence from tax rates applicable elsewhere in the UK.
There is no route back to economic growth without getting inflation under control. Supporting retailers to keep prices down has to be a priority.
David Lonsdale is the director of the Scottish Retail Consortium.