Rise in retail sales likely to contribute to inflationary pressures

Data from the Office for National Statistics show that retail sales volumes rose by 0.8% in October 2021, following stagnation (0.0% growth) between August and September.

This figure is 5.8% higher than in February 2020, before the onset of the pandemic.

It is likely that this rise in consumption is due to individuals starting their Christmas shopping early. The rise in consumption is largely due to increased confidence as there has been a high level of vaccine uptake (approximately 70% of the UK population is fully vaccinated). As consumers know that it is safer for them to physically visit shops, they are more willing to spend in shops. In addition, many retailers have put up their Christmas decorations at the beginning of November to ensure that customers feel ‘Christmassy’ i.e so that they have an incentive/reminder to complete their Christmas shopping.

A further possible reason for the early Christmas rush is that consumers are acutely aware of possible shortages. In the context of recent supply-side shortages (including lorry drivers for delivery), consumers will be wanting to purchase gifts and present early to secure them before they run out.

A consequence of increased consumption is higher economic growth. Consumption spending is a component of aggregate demand (aggregate demand as consumption makes up 66% of aggregate spending) and an injection into the circular flow of income. A rise in aggregate demand will lead to an expansion in aggregate supply, leading to higher real GDP and so, economic growth.

The higher economic growth comes with a trade-off with inflation. As aggregate demand increases, greater pressure is placed on scarcer goods/services and this increases their value, indicated by a rise in the price level - this is demand-pull inflation.

Inflation, as measured by the Consumer Prices Index (CPI), stood at 4.2% in October 2021, well above the targeted 2%.

The consequences of inflation, though not always negative, can include a worsening of living conditions for households. As price levels rise, those on fixed incomes, state pensions and JSA etc. are less able to afford goods and services, potentially leading to a lower quality of life.

This reduction in purchasing power could force individuals to switch from normal goods to inferior goods or perhaps cut back on spending altogether. This could increase food or heat poverty in the UK as individuals have to pick and choose between the two in order to preserve their disposable incomes.

It is highly likely that poverty levels will rise in the UK due to rising inflation, soaring energy bills, the likelihood of interest rates rising in coming months and the rise in tax rates from April next year.

Evidence for this rise in poverty is shown by data from The Trussel Trust - they released 2.5 million emergency food parcels in 2021, signifying that many in the UK cannot currently afford basic necessities.


Written by Deandra Peiris

Research compiled by Steven Li


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