Retail sales up but Christmas remains crucial
Consumer spending is ending the year on a strong note in the UK, according to November's retail sales figures which show a monthly rise in sales volumes of 0.3%.
October's sales volumes were also revised up from 0.5% to 0.7%. This was an encouraging data update for the UK after it was announced earlier in the week that inflation rose to 3.3% in November.
Howard Archer, chief UK and European economist at IHS Global Insight, said: "The overall impression is that retail sales were reasonable but unspectacular ahead of the key Christmas shopping period."
He added that sales volumes could have been held down in November by higher prices as the year-on-year rise in the retail sales deflator climbed to a six-month high of 2.3% - mainly due to a sharp rise in the deflator for textiles, clothing and footwear.
But the proof of the Christmas pudding is in the eating and December is the main month for retail sales.
Vicky Redwood, senior UK economist at Capital Economics, said: "Yesterday's CBI distributive trades survey suggested that high street spending was strong at the start of December. Admittedly, at least part of this strength probably reflects consumers bringing forward big-ticket spending ahead of the VAT rise (although note that household goods sales fell in November)."
The effect of poor weather on retail sales could also dampen Christmas cheer, with snow and ice descending on Britain again this weekend - the last pre-Christmas shopping weekend.
While poor high street visitor numbers at the start of December were largely recouped through online sales, many retailers have been forced to refuse any further orders for pre-Christmas delivery as they can't guarantee on-time arrival. So this weekend's sales will depend largely on footfall levels.
Dr Archer said: "Retailers will be desparately hoping that the further bad weather that is forecast to arrive shortly does not get in the way of consumers in the key final shopping days before Christmas.
"The problem for retailers stems not just from the bad weather stopping people getting to the shops but in the disruption it causes to supply chains."
Moving into 2011, concerns abound that consumers will be forced to limit spending due to low consumer confidence and the forthcoming fiscal squeeze. With VAT jumping to 20% on 1 January, rising energy bills expected by many and potentially higher levels of unemployment, people's pockets could be seriously hit.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).