Nervous shoppers fuel fears of stagflation

SHOPPERS have tightened their purse strings amid higher prices, fuel shortages and fears surrounding a steep rise in Covid cases.

Retail sales volumes dropped by 0.2pc in September compared to August, according to the Office for National Statistics, marking the fifth consecutive drop and disappointing expectations that the consumer economy would rebound.

It came as the latest purchasing managers’ index revealed costs picked up at their fastest pace on record in October with firms raising prices to cope with higher inflation.

However, the closely watched survey also suggested that the economy’s recovery unexpectedly regained speed, driven by “buoyant business and consumer spending”.

The composite PMI rose from 54.9 in September to 56.8, said IHS Markit, the highest for three months despite shortages dragging manufacturing output to an eight-month low. Any reading above 50 signals growth.

Economists said the pick-up will bolster the case for an interest rate rise at the Bank of England next month as analysts are caught between conflicting signals that price rises may be due to the economy overheating on the summer’s rapid rebound, or point to a bout of slow-growth high-price “stagflation”.

The phenomenon of stagflation – a period of stagnant growth combined with surging prices – was a scourge in the 1970s and is difficult to tackle with conventional government and central bank policies.

It comes as inflation rose to 3.1pc and Bank of England chief economist Huw Pill warned it could soon rise above 5pc, more than double the Bank’s target of 2pc. Fuel sales jumped 2.9pc in September, driven by the petrol panic which led to queues at forecourts as stations ran dry.

But purchases of household goods

tumbled by more than 9pc, dropping to their lowest level since before the pandemic.

Other non-food stores also saw their sales drop 1.7pc, with drops in demand for goods such as sports equipment.

Samuel Tombs at Pantheon Macroeconomics said petrol shortages are having serious knock-on effects.

“The direct boost to retail sales from panic-buying of motor fuel in September was far smaller than the damage that resulted from people only making essential journeys away from home,” he said.

Christmas spending could revive sales, Mr Tombs said, but households face a cocktail of rising costs which he predicts will slash disposable incomes by 1.5pc in the final quarter of the year.

Overall sales are 4.2pc above their pre-covid level, but fresh growth had been expected and the slide raises concerns the economy has run out of steam.

Next April workers and their employers face a rise in National Insurance. This will be particularly damaging for industries hit in the pandemic, according to the National Institute of Economic and Social Research.