UK retail: falling inflation and consumer demand lift sector

Receive free Lex updates

We’ll send you a myFT Daily Digest email rounding up the latest Lex news every morning.

Shopping sprees and nights out are driving British consumer resilience. Retailers are reaping the rewards. On Thursday, both Next and JD Sports offered positive surprises in market updates.

Next raised profit forecasts for the third time in four months. Upgrades from cautious chief executive Simon Wolfson are nothing new. But the improved outlook for full-price sales growth, up to 2 per cent for the second half of the year, shows that consumer spending has not been squashed by the cost of living crisis.

JD Sports investors had been bracing themselves for bad news following disappointing results from US peers. Relief at rising sales sent shares 8 per cent higher. Market share gains at sofa market DFS lifted its share price too.

The full impact of higher rates has not yet been felt by all consumers. Millions of mortgages need to be refinanced at higher rates. But there are signs that the worst may be over. Inflation eased in August and rate rises were halted for the first time in almost two years.

Next noted the impact of slowing inflation. Cost of goods rose at a 7 per cent annual rate in the first half of the year. It is expected to fall to about 2 per cent in the second half and disappear altogether next year.

Pay rises appear to have prompted UK shoppers to keep spending despite higher prices. Real UK incomes may begin to experience growth later this year if inflation continues to subside, according to Capital Economics.

Excess savings built up during the pandemic may be another factor keeping sales buoyant. The UK has been one of the biggest beneficiaries. A sum equal to about 10 per cent of gross domestic product remained as of the start of this year, estimates Deutsche Bank. Even with deposit withdrawals at record levels, this has not been depleted.

The result is a retail sector that has outperformed the broader market and retailers across Europe over the past year. Open wallets should keep the outperformance going.