UK Inflation Plunges As Retail Sales Drop By Most On Record

Tyler Durden's picture

Earlier today UK economic data confirmed that the recent hike by the ECB may well have been the dumbest decision taken in Europe in 2011 (aside from continuing to bail out continental bankers with impunity). Consumer prices rose 4 percent from a year earlier after a 4.4 percent increase in February, the Office for National Statistics said today in London. The cost of food fell the most in almost four years. Consensus inflation was for another 4.4% rise. The reason why inflation plunged - a complete obliteration in retail sales, which fell by a record in March, the British Retail Consortium said today, removing any pricing power by retailers. Of course, in America where the government is doing all it can to prevent deadbeats from paying their mortgage, we still have a long ways to go before retail sales actually drop to the point where inflation is constrained by actual real "pro forma" wages. Most importantly, this outcome confirms that the BOE was lucky enough not to rush and hike ahead, leaving the ECB as the only central bank with a tightening regime and one which will soon bring Spain to the brink of insolvency.

Some observations from Goldman on the UK economy:

Inflation declines

BOTTOM LINE: CPI inflation fell from +4.4%yoy to +4.0%yoy in March, its first decline for seven months and significantly lower than expected (GS: +4.6%, Cons: +4.4%). This constitutes the first downside surprise to consensus expectations on CPI inflation for almost a year, and the largest downside surprise for almost four years. Realised inflation in Q1 is nevertheless close to what the MPC forecast in its February Inflation Report, though the March CPI reading implies downside risk relative to the committee's mean forecast for Q2 (+4.4%yoy).

1. The main contributors to the +4.0% rate of year-on-year CPI inflation in March were again commodity price-related: fuels and lubricants rose +15.9%yoy and air fares rose +4.2%yoy. The decline in the rate of year-on-year inflation (from 4.4% to 4.0%) between February and March was driven by price changes in basic food items. According to the ONS, these reflected supermarket-led sales. In the opposite direction, increases in electricity and gas bills again exerted upward pressure on inflation.

2. Today's data constitutes the first downside inflation surprise to consensus expectations for ten months, and the largest surprise for more than three years (Chart 1). But it leaves average inflation in Q1 (+4.1%yoy) now exactly in line with the MPC's mean forecast from February. It's still too early to assess whether today's print reduces the "significant risk" expressed by several MPC members that inflation breaches 5% in the near-term. However, this tentative sign of retreating inflation, combined with a softening of the official monthly data (February IP and construction, for example), will only complicate an already disparate constellation of views on the MPC regarding the appropriate balance between soft activity and high inflation.

3. Also of note, the ONS has recently published its estimate of the impact of the January VAT increase on CPI. According to that analysis, the pass-through from retailers to consumer prices added just under 0.8%pts to year-on-year inflation in January: had VAT remained at 17.5%, January 2011 inflation would have come in closer to +3.2%yoy than the realised +4.0%yoy.

4. The VAT increase will continue to have a base effect on inflation through the duration of 2011. Combined with a rising contribution from commodity and food prices, we expect CPI inflation to remain close to 4% throughout 2011. Over the medium-term, downward base effects from recent energy price increases kick in only at the tail-end of this year, allowing a decline in headline inflation to around 3% by December. These downward forces are then likely to be amplified by base effects in early 2012 (from the January VAT increase) and extended through the first half of next year.

5. In other data overnight, the BRC survey registered like-for-like retail sales growth of -3.5%yoy in March, down from -0.4%yoy in February and the weakest reading since April 2005. The timing of the Easter holidays (in March 2010 but April 2011) is likely to have been a significant driver of this contraction: sales grew +4.4%yoy this time last year, implying a considerable negative base effect on today's figures. Even then, however, the indications are that sales volumes in March are likely to soften in the ONS retail sales series (Chart 2).

6. According to the BRC, the March decline was also driven by weakness in "big-ticket home and furniture purchases" which were "often promotion-led." The overnight data from the RICS Housing Market Survey for March reflected this: the balances indicative of activity in the housing market (new buyer enquiries, for example: housing turnover is well correlated with demand for consumer durables) remained stagnant (Chart 3), despite a small improvement in house prices.

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SloaneSquare's picture

Well I suspect the UK CPI number was leaked. I hear there's going to be an investigation and I hope a number of people are feeling the heat.

Boilermaker's picture

Uhhhh, yea, right.  Accountability for all.  Hang on to that dream, grasshopper.

Popo's picture

I just felt an enormous disturbance in the force.   As if millions of goldbugs cried out in terror.   And then there was silence.

I feel deflation has happened.



EscapeKey's picture

The weighting of food as part of the CPI is around 10%. Assuming all other weights are static for a minute (which they're not, of course), for the CPI to drop 0.4%, this must mean food prices dropped by 4%, which is absolute bullshit.

Raymond K Hassel's picture

Ipads are cheaper, who cares about food? 

pendragon's picture

what nonsense. why wuld you assume everything else is flat if retail sales are collapsing?

overmedicatedundersexed's picture

higher taxes is what is called for to stimulate buying..

pendragon's picture

gotta fill those holes that gordon brown left somehow

SheepDog-One's picture

How many holes DOES it take to fill the Albert Hall?

augie's picture

that sounds like a british boarding school joke. Albert must have been very popular.

EscapeKey's picture

Because, as the report states, some figures increased, some decreased, and food is specifically highlighted an item which decreased.

Besides, lower retail sales don't contribute to lower inflation, unless the prices actually drop. Rack up another reason why the Austrians' definition of inflation makes so much more sense.

pendragon's picture

so if retailers don't sell anything they keep their prices static or raise them? i don't think you live in the real world

EscapeKey's picture

Was grocers particularly highlighted in the report, with regards to contributing negatively to the overall inflation pressure, yes or no?

Was retail otherwise highlighted as having had a positive contribution to inflation, yes or no?

Anyway, according to your own statement, Mervyn King is the "best central banker in the world", which sort of establishes the world you live in.

Oh, here you are. It would assume my original statement wasn't a million miles off. I'm still to see this alleged 4.7% drop in the price of fruit.

The drop in CPI was driven by food and non-alcoholic beverages, the ONS said, “where prices overall fell by 1.4pc between February and March this year”. “Prices have fallen this year due to sales at several supermarket chains,” it added.

The biggest falls were in fruit, where prices fell by 4.7pc; bread and cereals, with a 2.6pc fall; and smaller declines in meat, milk, vegetables, sugar, coffee, tea and cocoa.

pendragon's picture

i don't know where you do your shopping but my grocery bills haven't really gone up.... as i said it was not a high bar. maybe you would prefer the trichet regime and the ship of fools

pendragon's picture

you are answering your own question. they give you the breakdown and it is explicit.

THE DORK OF CORK's picture

Try to seperate Goverment money from credit money - I know its hard given what the CBs have done.

If treasuries / CBs increase the size of their balance sheet to cover the losses withen the private term and bond accounts they will devalue the money as the intrinsic value of the money is directly linked to this small sector of the overall monetory system.

They need deposits built up during the credit boom starting in the early 80s to flow into Gold and recapitalise their balance sheets.

That credit money  essentially shadows the housing sector - when the houses reach their true value the housing mortgage assets will not match banks  liabilties on deposit.

Once there is no default on term deposits this money will flow into Gold.

Boilermaker's picture

If only there were 4 nuclear reactors melting down to pull them out of this for the 'reconstruction' benefits.


AUD's picture

A downside inflation surprise!

Well fuck me.

Boilermaker's picture

Pull my finger....SURPRISE!

AUD's picture

Ahh..... so that's where these inflation figures come from. It all makes so much sense to me now.

TaxSlave's picture

Uh, this does not sound like a decrease in inflation.

ivars's picture

UK heading for recession already this year so prices just cant raise anymore. As will Japan. How many more needed to help the USA to get there?

SheepDog-One's picture high can you raise prices on the bankrupt and unemployed?? Not very far before people simply cant buy anything. Also in the US fuel price hikes are being met by lower demand as prices rise. I know they want higher fuel, cant raise prices into declining demand though. Thats 'Fo Reelz' economic model.

max2205's picture

One month does not negate a trend. I think they should have Raised rates more. We should be raising rates or old people will starve. Bankers have had 2 full years living off the spread. Time to end that

BTW Uk #s are so manipulated I don't know why you believe them

pendragon's picture

how are they manipulated? the ONS is a completely different animal to the BLS.

pendragon's picture

they are not "lucky"....just that mervn king is the best central banker on the planet. not a high bar granted

EscapeKey's picture

Mervyn King, they guy who for 4 years running now has insisted that inflation is due to temporary factors?

pendragon's picture

youre not asking to have the VAT debate again....?

EscapeKey's picture

And before the VAT debate, there was another excuse. For 4 years running now.

pendragon's picture

again youre talking out of your rear end.. on the ONS website the chart of CPI was below 3 for the part of last year that is charted. if the economy is in the tank the inflation band should be used to run a looser policy.

EscapeKey's picture

Oh right, since I quote just about every newspaper AND the BoE's own website, I can only conclude you know better than everyone else in this country. At least in your own mind.

pendragon's picture

just about every newspaper or from the horses mouth....the ONS chart.

pendragon's picture

just about every newspaper or from the horses mouth....the ONS chart.

DoctoRx's picture

Dumbest decision I know, from Stateside, that the Europeans have taken is going to war in Libya.

Global Hunter's picture

They corrected that by going to war in the Ivory Coast and backing the muslim and they hedged that trade by banning the burkah in public in France.  (sarc)

topcallingtroll's picture

The deflation monster is coming.

I am mostly cash now, but pulling a kamikazi run with cyh.
I wouldnt be surprised if it pops ten.dollars today. Fraud hysteria was overblown.

johny2's picture

Funny, the same people who complain about policy being too accomodative complain when the rates go up. And even more funny is that it makes sense.

Welfareisfraud's picture

But it doesn't. It's just pretending and extending. The market took a good battering with the recent crisis and many of the EU countries have spent their way into oblivion. Artificially keeping interest rates low just to keep self-entitled constituencies pleased is not going to change this. Sure, if you're a politician, it's a "dumb" move. If you're anyone else in the real world, it's the road to recovery. More than that, the ECB should fuck off entirely and not set rates at all. But lower interest rates when real savings have plummeted? No way.

thepigman's picture

Sounds depressionary.

writingsonthewall's picture

TD - I would be wary of today's inflation numbers - I believe these are the first set of numbers produced since they altered the basket of goods which are used to measure inflation.


The addition of 'iPhone Apps' and 'dating agency fees' does not leave me very surprised that the picture is of falling inflation this month. It's just another form off Government cover-up, hiding the real inflation which is in essentials such as food and rent.

By adding in less essential items they can ensure that price inflation is subdued in the numbers - I would expect the frivolous services of dating fees and Iphone apps to fall as the competition hots up and discounts are used to help encourage sales. In areas of essentials inflation is rampant.


I have even heard the dreaded "doing my shopping as soon as I get paid these days" doing the rounds lately - this is a sign of loss of confidence in the pound.

Not that it matters anyway - when the 'cease fire' is over in Libya - then the ground swell of inflation caused by fuel prices will further impact on household incomes.

The Government is foolish, it's embarking on a policy of stagflation - printing money whilst cutting jobs (austerity) and reducing consumption. It's a total mess.


Anarchy awaits us all.

EscapeKey's picture

I just had a quick look at NS's website, and here's an interesting thing -

CPI Weightings suggest 10.8% is spent on food (also suggests amount spent on transportation has remained static over 10 years!):

Average household income is just below £30k, which means 10.8% about £3,200 for the average household to spend on food, or £62 per week:

Average number of people/household in 2002 was 2.36, so we'll say 2.30 for 2010:

This means, on a per-person basis, the average person has 62 / 2.30 = £27/week to spend on food.

wareco's picture

Tyler.  Which is it?  Is inflation soaring as stated in the previous headline post, or is it plunging, as stated in this headline? 

Popo's picture

If you need it to get by, its price is increasing.

If you can get by without it, the price is plunging.

gkm's picture

What does the ECB rate hike have to do with the cost of funding Spanish government debt?  The answer: very little.

SheepDog-One's picture

You can only raise prices so much on people with no money before sales drop off the cliff, thats just Hood Econ 101.

MallaKite's picture

most of the uk population have the attention span and memory of a baby goldfish when it comes to stats and inflation..... and Mervin K knows it