The UK consumer continues to be squeezed by high inflation, weak wage growth, and a labor market that is deteriorating.

In Tuesday’s European session we saw the that the annual CPI climbed to 5.2% for September, a reading that was higher than expected, and shows the difficulty that UK households are facing.

With higher gas (+13%), electricity (+7.5%) and food (6.4%) bills, as well as a sharp jump in transportation costs (8.9%), the outlook for domestic demand heading forward is a weak one.

In September, the CBI retail sales survey fell to its weakest level in 16 months. The survey showed a net balance of -15% of retailers saying sales were higher than the same month last year compared with those who said sales fell. The BRC retail sales monitor meanwhile did show the its sales index climbing 0.3% y/y in September, following a 0.6% y/y decline in August.

While inflation runs at a 5.2% pace, wage growth is rising at a much slower pace – an average of 1.8% according to latest statistics. Therefore UK households are having to cut back on spending as prices rise more than incomes. At the same time number of unemployed in the UK – at 2.57 million – has climbed to a 17-year high.

Therefore, as we consider the prospect for 3rd quarter growth in the UK, we want to gauge the state of consumer spending.

In Thursday’s European session the UK releases its September reading on retail sales – a key component of overall household spending. This report will help give us a picture of domestic demand.

In August retail sales fell 0.2% month-over-month, and expectations is that sales will rise a paltry 0.1% in September compared to August. On the year, sales were down 0.1% in August.

Here is the index used to take the monthly and annual rates:

And a video from the Office of National Statistics:

 

3 Scenarios for Septembers Report:

Better than Expected Scenario: If retail sales come in stronger-than-expected, posting a gain of 0.3% are higher it may work to knock back some of these more pessimistic expectations for UK consumers and therefore expectations for GDP in the UK for the 3rd quarter and going forward. This could help to boost the fortunes of the pound, though the overall fundamental picture for the UK is still a tough one and the bounce in the pound therefore may be short-lived.

Weaker Than Expected Scenario: If retail sales come in weaker than expected, putting in a negative reading for the September period it will further the theme that the UK recovery continues to be fragile and that there is a possibility of negative growth in the third quarter. Such a reading would pressure the pound as it would accentuate the difficulties that the economy faces currently.

Status Quo Scenario: If retail sales come in as expected with a small 0.1% gain it doesn’t do much for the pound. The fragile recovery would continue and investors would continue to focus on the difficulties lying ahead for UK consumers. Focus would also remain on the recent move by the Bank of England to expand its quantitative easing program, which dilutes the value of countries currency and may cause inflation to continue to be elevated.

- Nick Nasad is the Chief Market Analyst at FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.