The pound rose after the release of better-than-expected retail sales for April.  UK retail sales volumes rose by 1.4% in April after falling 1.2% in March. The result is higher than the -0.2% the market was expecting. While rising inflation might not have destroyed consumer spending, economists are warning that the BoE will need to act immediately to curb inflationary pressures.

Retail sales

Food store sales volumes rose 2.8%, as consumers spent more on alcohol and tobacco in supermarkets. Alcohol and tobacco sales volumes jumped 8.4% in April, suggesting that consumers spent more time visiting the off-licence instead of the pub. Clothes sales also rose as the summer holidays and weddings are approaching. Fuel sales rose 1.4% after they fell 4.2% in March following higher petrol prices.

The wider picture is however disappointing as over the last three months, sales volumes fell by 0.3% when compared with the previous quarter. As ONS deputy director for surveys and economic indicators Heather Bovill said: “Retail sales picked up in April after last month’s fall. However, these figures still show a continued longer-term downward trend.”

Some analysts are optimistic and have noted that the report shows that the cost-of-living crisis hasn’t destroyed consumer spending. While things may get worse as inflation rises further, economic activity remains resilient.

Rising inflation: BoE chief economist’s warning

Huw Pill has warned that monetary policy needs to be tightened to stop inflation getting out of hand. In a speech to the Association of Chartered Certified Accountants in Wales, Pill said that the central bank has to deal with soaring inflation which threatens to become embedded in domestic price setting and slowdown growth by squeezing household incomes. Pill said that “the balance of risk is tilted towards inflation proving stronger and more persistent than anticipated in that baseline.”

In response to Pill’s warning, Samuel Gee, director at Bristol-based Manning Gee Investments, said that rates will continue to rise, but the economy will cope with more gradual increases, as the Fed’s more aggressive hiking plan has already countered concerns. In the UK, with an economy recovering from the pandemic and a war in Europe, there are many difficulties and risks.

Allan Monks, economist at JPMorgan, said that Pill’s concerns reveal that the MPC is perhaps “leaning towards a more hawkish interpretation” of the bank’s recent guidance.

Another warning came from former Bank of England governor Mervyn King who said that British people should expect a "very unpleasant period", with "considerable" interest rate hikes.

Lord King attacked central banks including the Bank of England and said they should take responsibility for the cost of living crisis which has pushed inflation higher. He said they would have to raise interest rates immediately: "It takes tough action. And it's not a pleasant period through which we're going to have to go."

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