Category: Essential Economics for Business: Ch 01

Posted on

Shrinkflation, skimpflation and sneakflation: ways of hiding inflation

Have you noticed that many products in the supermarket seem to be getting smaller or are poorer quality, or that special offers are not as special as they used to be? When you ring customer services, does it seem that you have to wait longer than you used to? Do you now have to pay for extras that used to be free? These are all ways that producers try to pass on cost increases to consumers without rising prices. There are three broad ways in which producers try to hide inflation.

The first is called ‘shrinkflation’. It is defined as having less product in the same package or a smaller package for the same price. For example, reducing the number of chocolates in a tub, reducing the size of a can of beans, jar of coffee or block of butter, reducing the number of sheets in a toilet roll, or the length of a ride in a fairground or portion sizes in a restaurant or takeaway. A 2023 YouGov poll revealed that 75% of UK adults are either ‘very’ or ‘fairly’ concerned about shrinkflation. A similar poll in 2025 showed that this figure had increased to 80%. The product category with the greatest concerns was snack foods (e.g. crisps, confectionery items, nuts, etc.).1

The second form of hidden inflation is called ‘skimpflation’. This is defined as decreasing the quality of a product or service without lowering the price. Examples include cheaper ingredients in food or confectionery, such as using palm oil instead of butter, or reducing the cocoa content in chocolate or the meat content in sausages and pies, or package holidays reducing the quality of meals, or customer service centres or shops reducing the number of staff so that people have to wait longer on the phone or to be served.

The third is called ‘sneakflation’. This is similar to skimpflation but normally refers to reducing what you get when you pay for a service, such as a flight, by now charging for extras, such as luggage or food. Sometimes shrinkflation or skimpflation are seen as subsets of sneakflation.

These practices have had a lot of publicity in recent months, with consumers complaining that they are getting less for their money. Many people see them as a sneaky way of passing on cost increases without raising the price. But the changes are often subtle and difficult for shoppers to spot when they are buying an item. Skimpflation especially is difficult to observe at the time of purchase. It’s only when people consume the product that they think that it doesn’t seem as good as it used to be. Even shrinkflation can be hard to spot if the package size remains the same but there is less in it, such as fewer biscuits in a tin or fewer crisps in a packet. People would have to check the weight or volume, while also knowing what it used to be.

If firms are legitimately passing on costs and are up-front about what they are doing, then most consumers would probably understand it even if they did not like it. It’s when firms do it sneakily that many consumers get upset. Also, firms may do it to increase profit margins – in other words, by reducing the size or quality beyond what is necessary to cover the cost increase.

Does the official rate of inflation take such practices into account?

The answer is that some of the practices are taken into account – especially shrinkflation. The Office for National Statistics (ONS) accounts for shrinkflation by monitoring price changes per unit of weight or volume, rather than just the price. Data collectors track the weight, volume or count of item. When a product’s size is reduced, the ONS records this as a price increase in CPI or CPIH inflation statistics. This is known as a ‘quality adjustment’ process and allows the ONS to isolate price changes from product size changes. As CPI data from the ONS is used by the Bank of England in monitoring its 2% inflation target, it too is incorporating shrinkflation.

ONS quality adjustments are also applied to non-market public services, such as healthcare, education and policing to measure changes in service quality rather than just volume. This allows a more accurate measurement of productivity as it focuses on outcomes and user experience per pound spent rather than just focusing on costs.

Skimpflation is more difficult to monitor. The quality adjustment process may miss some quality changes and hence some skimpflation goes unrecorded. This means that the headline inflation rate might understate the true decline in purchasing power felt by consumers.

How extensive is hidden inflation?

Despite public perception, shrinkflation has a relatively small impact on the headline CPI and CPIH inflation rate in the UK because it is largely confined to certain sectors, such as bread and cereals, personal care products, meat products, and sugar, jams, syrups, chocolate & confectionery. Nevertheless, in these sectors it is particularly prevalent, especially in the packaged foodstuffs and confectionery sector. The latest research by the ONS in 2019 covered the period June 2015 to June 2017 and is shown in the following figure.2

According to research in the USA by Capital One Shopping, some major brands reduced product sizes by over 30% in 2025 without reducing prices, with shrinkflation averaging 14.8% among selected national grocery brands.3 Shrinkflation had been observed by 74% of Americans at their grocery store. Of these, 81% took some kind of action as a result, with 48% abandoning a brand. Nevertheless, across all products, shrinkflation accounts for quite a small percentage of any overall price rises.

A US Government Accountability Office (GAO) report found that shrinkflation accounted for less than 1/10 of a percentage point of the 34.5% increase in overall consumer prices from 2019 to 2024.4 The reason is that the items that were downsized comprised a small percentage of goods and services. Indeed, many goods and services, such as housing, cannot be downsized in the same way that household products can.

Nevertheless, with consumer budgets being squeezed by the inflation that followed the pandemic and the Russian invasion of Ukraine, hidden inflation has become more prevalent in many countries and an increasing concern of consumers.

References

  1. Shrinkflation concern rises in 2025, but fewer Britons are changing shopping habits

    2. YouGov (15/8/25)

  2. Shrinkflation: How many of our products are getting smaller?

    3. Office for National Statistics (21/1/19)

  3. Shrinkflation Statistics

    4. Capital One Shopping (30/12/25)

  4. What is “Shrinkflation,” And How Has It Affected Grocery Store Items Recently?

    5. U.S. Government Accountability Office (12/8/25)

Videos

Articles

Journal Article

Questions

  1. If shrinkflation, when included in CPI statistics, accounts for such a small percentage of inflation, why are people so concerned about it?
  2. From a company’s perspective, is it a good idea to engage in (a) shrinkflation; (b) skimpflation?
  3. Go round you local supermarket and identify examples of shrinkflation and skimpflation.
  4. How are various EU countries attempting to inform consumers of shrinkflation?
  5. Why is skimpflation often harder to detect than shrinkflation?
  6. Give some other examples of sneakflation in the provision of services.
  7. How could behavioural economists help firms decide whether or how to engage in shrinkflation or skimpflation?
Posted on

Gold: why the world’s oldest safe haven is back in the spotlight

The gold market has become one of the most talked-about commodity markets in 2025, with prices reaching record highs. This is largely due to increased demand from investors, who see gold as a ‘safe haven’ during times of economic and political uncertainty. Central banks are also buying more gold as a way to reduce their reliance on currencies like the US dollar. With many analysts predicting prices could reach over $4000 per ounce in the next year, the gold market is showcasing how supply and demand, confidence, and global events can all influence a commodity market.

The commodities market is where basic agricultural products, raw materials and metals, such as gold, are bought and sold, often in large quantities and across global exchanges. Commodities are typically traded either in their physical form (like gold bars) at current market prices (spot prices) or through financial contracts, where investors buy or sell in futures markets. These are where a price is agreed today to buy or sell on a specific future date.

As with other commodities, the price of gold is determined by supply and demand. Demand for gold typically rises during times of economic uncertainty as investors want a safer store of value. This results in an increase in its price. Supply and demand, and hence price, also respond to other factors, including interest rates, currency movements, economic growth and growth prospects, and geopolitical events.

Record high prices

This year, the gold market has seen a remarkable rally, with the price of gold hitting a record high. Demand for the precious metal has resulted in spot prices surging over 35% to date (see the chart: click here for a PowerPoint). Rising prices earlier this year have been attributed to the US President, Donald Trump, announcing wide-ranging tariffs which have upset global trade. On 2 September, the spot gold price hit $3508.50 per ounce, continuing its upwards trend.

The price has also been lifted by expectations that the Federal Reserve (the US central bank) will cut its key interest rate, making gold an even more attractive prospect for investors. If the Federal Reserve cuts interest rates, the price of gold usually increases. This is because gold does not pay any interest or yield, so when interest rates are high, investors can earn better returns from alternatives, such as savings accounts or bonds. However, when interest rates fall, those returns become less attractive, making gold relatively more appealing.

Lower interest rates also tend to weaken the US dollar, which makes gold cheaper for foreign buyers, increasing global demand. Since gold is priced in dollars, a weaker dollar usually leads to higher gold prices.

Additionally, interest rate cuts are often a response to economic problems or uncertainty. As gold is viewed as a safer asset for investors during times of economic uncertainty, investors will typically increase their demand.

Unlike the market for currencies or shares, gold doesn’t rely on the performance of a government or company. This makes it attractive when people are worried about things like inflation, recession, war or stock market crashes. Gold is thus seen as a ‘safe haven’.

Gold and the Federal Reserve

The rise in the price of gold by more than a third this year can be linked to the US election last year, according to the director of research at BullionVault (see the BBC article below). Attitudes of the Trump administration towards the Federal Reserve have created concerns among investors. Fears that the US administration could erode the independence of the world’s most important central bank have fuelled the latest flows into the metal, which is traditionally viewed as a hedge against inflation.

According to the BBC article, Derren Nathan from Hargreaves Lansdown claims that it is Trump’s ‘attempts to undermine the independence of the Federal Reserve Bank’ that were ‘driving renewed interest in safe haven assets, including gold’. Investors are concerned that a politicised Fed would be more inclined to cut interest rates than would otherwise be the case, sending long-term inflation expectations higher.

This could lead to fears that future interest rates would then be pushed higher. This would increase the yields on longer-term government bonds by pushing down their price, as investors demand higher compensation for the increased risk of higher future interest rates reducing the value of their fixed-rate investments. This would force the US Treasury to pay higher interest on new bonds, making it more expensive to service US government debt.

Expected price rises for 2026

As we saw above, it is predicted that the price of gold will rise to $4000 per ounce next year. However, if the market sees investors move away from dollar assets, such as US Treasuries, the price increases would be even higher. Daan Struyven, co-head of global commodities research at Goldman Sachs explains ‘If 1 per cent of the privately owned US Treasury market were to flow to gold, the gold price would rise to nearly $5000 per troy ounce’ (see Financial Times article below).

If the Federal Reserve does come under political pressure, it could affect the stability of the US economy and beyond. When gold prices rise sharply, demand usually falls in countries like China and India, which are the world’s largest buyers of gold jewellery. However, in 2025, this trend has changed. Instead of reducing their gold purchases, people in these countries have started buying investment gold, such as bars and coins, showing a shift in consumer behaviour from jewellery to investment assets.

At the same time, global events are also influencing the gold market. Suki Cooper, a metals analyst at Standard Chartered, said that events like Russia’s invasion of Ukraine have added to political uncertainty, which tends to increase demand for gold as a safe-haven asset. She also highlighted how changes in international trade policies have disrupted supply chains and contributed to higher inflation, both of which have made gold more attractive to investors. Additionally, a weaker US dollar earlier in the year made gold cheaper for buyers using other currencies, which boosted global demand even further.

Conclusion

Although the gold market is expected to remain strong over the next six months, some uncertainty remains. Many analysts predict that gold prices will stay high or even increase further, especially if interest rates in the US are cut as expected. Continued global instability, is also likely to keep demand for gold as a safe haven high. At the same time, if inflation stays elevated or trade disruptions continue, more investors may turn to gold to protect their wealth.

However, if economic conditions stabilise or interest rates rise again, gold demand could fall slightly, leading to a potential dip in prices. Overall, the outlook for gold remains positive, but sensitive to changes in global economic and political events.

Articles

Data

Questions

  1. What factors influence the price of a commodity such as gold on the global market?
  2. Use a demand and supply diagram to illustrate what has been happening to the gold price in recent months.
  3. Find out what has been happening to silver prices. Are the explanations for the price changes the same as for gold?
  4. Why might investors choose to buy gold during times of economic or political uncertainty?
  5. How will changes in interest rates affect both the demand for and the price of gold?
  6. What are the possible consequences of rising gold prices for countries like India and China, where there is a traditionally high demand for gold jewellery?
  7. How do global events impact commodity markets? Use gold as an example in your answer.
Posted on

Rising global uncertainty and its effects

In a blog in October 2024, we looked at global uncertainty and how it can be captured in a World Uncertainty Index. The blog stated that ‘We continue to live through incredibly turbulent times. In the past decade or so we have experienced a global financial crisis, a global health emergency, seen the UK’s departure from the European Union, and witnessed increasing levels of geopolitical tension and conflict’.

Since then, Donald Trump has been elected for a second term and has introduced sweeping tariffs. What is more, the tariffs announced on so-called ‘Liberation Day‘ have not remained fixed, but have fluctuated with negotiations and threatened retaliation. The resulting uncertainty makes it very hard for businesses to plan and many have been unwilling to commit to investment decisions. The uncertainty has been compounded by geopolitical events, such as the continuing war in Ukraine, the war in Gaza and the June 13 Israeli attack on Iran.

The World Uncertainty Index (WUI) tracks uncertainty around the world by applying a form of text mining known as ‘term frequency’ to the country reports produced by the Economist Intelligence Unit (EIU). The words searched for are ‘uncertain’, ‘uncertainty’ and ‘uncertainties’ and the number of times they occur as percentage of the total words is recorded. To produce the WUI this figure is then multiplied by 1m. A higher WUI number indicates a greater level of uncertainty.

The monthly global average WUI is shown in Chart 1 (click here for a PowerPoint). It is based on 71 countries. Since 2008 the WUI has averaged a little over 23 000: i.e. 2.3 per cent of the text in EIU reports contains the word ‘uncertainty’ or a close variant. In May 2025, it was almost 79 000 – the highest since the index was first complied in 2008. The previous highest was in March 2020, at the start of the COVID-19 outbreak, when the index rose to just over 56 000.

The second chart shows the World Trade Uncertainty Index (WTUI), published on the same site as the WUI (click here for a PowerPoint). The method adopted in its construction therefore mirrors that for the WUI but counts the number of times in EIU country reports ‘uncertainty’ is mentioned within proximity to a word related to trade, such as ‘protectionism’, ‘NAFTA’, ‘tariff’, ‘trade’, ‘UNCTAD’ or ‘WTO.’

The chart shows that in May 2025, the WTUI had risen to just over 23 000 – the second highest since December 2019, when President Trump imposed a new round of tariffs on Chinese imports and announced that he would restore steel tariffs on Brazil and Argentina. Since 2008, the WTUI has averaged just 2228.

It remains to be seen whether more stability in trade relations and geopolitics will allow WUI and WUTI to decline once more, or whether greater instability will simply lead to greater uncertainty, with damaging consequences for investment and also for consumption and employment.

Articles

Uncertainty Indices

Questions

  1. Explain what is meant by ‘text mining’. What are its strengths and weaknesses in assessing business, consumer and trade uncertainty?
  2. Explain how the UK Monthly EPU Index is derived.
  3. Why has uncertainty increased so dramatically since the start of 2025?
  4. Compare indices based on text mining with confidence indices.
  5. Plot consumer and business/industry confidence indicators for the past 24 months, using EC data. Do they correspond with the WUI?
  6. How may uncertainty affect consumers’ decisions?
Posted on

Getting real with house prices

When I worked as a professional economist at HM Treasury and later the Council of Mortgage Lenders (now part of UK Finance), I would regularly brief on the state of the affordability of housing, with a particular focus on the owner-occupied market. That was back in the late 1990s. Fast forward a quarter of a century and I recognise not only how much I have aged but also how deep-rooted and long-standing the affordability problem is.

It is perhaps not surprising that in her first speech as the new Chancellor of the Exchequer, Rachel Reeves, referenced directly the housing market and the need to address supply-side issues. She has set a target of one and a half million new homes built over the next five years.

It is therefore timely to revisit the trends in house prices across the UK. By applying the distinction between nominal and real values we get a very clear sense of the deteriorating affordability of housing.

Nominal house price patterns

The average UK actual or nominal house price in April 2024 was £281 000. As Chart 1 shows, this masks considerable differences across the UK. In England the average price was £298 000 (105 per cent of the UK average), though this is heavily skewed by London where the average price was £502 000 (178 per cent of the UK average). Meanwhile, in Scotland it was £190 000 (68 per cent of the UK average), in Wales £208 000 (74 per cent of the UK average) and in Northern Ireland it was £178 000 (74 per cent of the UK average). (Click here to download a PowerPoint copy of the chart.)

A simple comparison of the average house price in April 2024 with January 1970 reveals a 72-fold increase in the UK, an 80-fold increase in England, including a 101-fold increase in London, a 65-fold increase in Wales, a 59-fold increase in Scotland and a 45-fold increase in Northern Ireland. Whilst these figures are sensitive to the particular period over which we choose to measure, there is little doubting that upward long-term trend in house prices.

Whilst nominal prices trend upwards over time, the short-term rates of increase are highly volatile. This can be seen from an inspection of Chart 2, which shows the annual rates of increase across the four nations of the UK, as well as for London. This is evidence of frequent imbalances between the flows of property on to the market to sell (instructions to sell) and the number of people looking to buy (instructions to buy). An increase in instructions to buy (housing demand) relative to those to sell (housing supply) puts upward pressure on prices; an increase in the number of instructions to sell (housing supply) relative to those to buy (housing demand) puts downward pressure on prices. (Click here to download a PowerPoint copy of the chart.)

Chart 2 nicely captures the recent slowdown in the housing market. The inflationary shock that began to take hold in 2021 led the Bank of England to raise Bank Rate on 15 occasions – from 0.25 per cent in December 2021 to 5.25 per cent in August 2023 (which remains the rate at the time of writing, but could be cut at the next Bank of England meeting on 1 August 2024). Higher Bank Rate has pushed up mortgage rates, which has contributed to an easing of housing demand. Demand has also been dampened by weak growth in the economy, higher costs of living and fragile consumer confidence. The result has been a sharp fall in the rate of house price inflation, with many parts of the UK experiencing house price deflation. As the chart shows, the rate of deflation has been particularly pronounced and protracted in London, with house prices in January 2024 falling at an annual rate of 5.1 per cent.

Real house price patterns

Despite the volatility in house prices, such as those of recent times, the longer-term trend in house prices is nonetheless upwards. To understand just how rapidly UK house prices have grown over time, we now consider their growth relative to consumer prices. This allows us to analyse the degree to which there has been an increase in real house prices.

To calculate real or inflation-adjusted house prices, we deflate nominal house prices by the Consumer Prices Index (CPI). Chart 3 shows the resulting real house prices series across the UK as if consumer prices were fixed at 2015 levels.

The key message here is that over the longer-term we cannot fully explain the growth in actual (nominal) house prices by the growth in consumer prices. Rather, we see real increases in house prices. Inflation-adjusted UK house prices were 5.3 times higher in April 2024 compared to January 1970. For England the figure was 5.9 times, Wales 4.8 times, Scotland 4.3 times and for Northern Ireland 3.3 times. In London, inflation-adjusted house prices were 7.4 times higher. (Click here to download a PowerPoint copy of the chart.)

As we saw with nominal house prices, the estimated long-term increase in real house prices is naturally sensitive to the period over which we measure. For example, the average real UK house price in August 2022 was 5.8 times higher than in January 1970, while in London they were 8.7 times higher. But the message is clear – the long-term increase is not merely nominal, reflecting increasing prices generally, but is real, reflecting pressures that are increasing house prices relative to general price levels.

Chart 4 shows how the volatility in house prices continues to be evident when house prices are adjusted for changes in consumer prices. The UK’s annual rate of real house price inflation was as high as 40 per in January 1973; on the other hand, in June 1975 inflation-adjusted house prices were 15 per cent lower than a year earlier. (Click here to download a PowerPoint copy of the chart.)

Over the period from January 1970 to April 2024, the average annual rate of real house price inflation in the UK was 3.2 per cent. Hence house prices have, on average, grown at an annual rate of consumer price inflation plus 3.2 per cent. For the four nations, real house price inflation has averaged 3.8 per cent in England, 3.4 per cent in Wales, 3.0 per cent in Scotland and 2.9 per cent in Northern Ireland. Further, the average rate of real house price inflation in London since January 1970 has been 4.5 per cent. By contrast, that for the East and West Midlands has been 3.7 and 3.5 per cent respectively. The important point here is that the pace with which inflation-adjusted house prices have risen helps to contextualise the extent of the problem of housing affordability – a problem that only worsens over time when real incomes do not keep pace.

House building

The newly elected Labour government has made the argument that it needs to prioritise planning reform as an engine for economic growth. While this ambition extends beyond housing, the scale of the supply-side problem facing the housing market can be seen in Chart 5. The chart shows the number of housing completions in the UK since 1950 by type of tenure. (Click here to download a PowerPoint copy of the chart.)

The chart shows the extent of the growth in house building in the UK that occurred from the 1950s and into the 1970s. Over these three decades the typical number of new properties completed each year was around 320 000 or 6 per thousand of the population. The peak of house building was in the late 1960s when completions exceeded 400 000 per year or over 7.5 per thousand of the population. It is also noticeable how new local authority housing (‘council houses’) played a much larger role in the overall housing mix.

Since 1980, the average number of housing completions each year has dropped to 191 000 or 3.2 per thousand of the population. If we consider the period since 2000, the number of completions has averaged only 181 000 per year or 2.9 per thousand of the population. While it is important to understand the pressures on housing demand in any assessment of the growth in real house prices, the lack of growth in supply is also a key factor. The fact that less than half the number of properties per thousand people are now being built compared with half a century or so ago is an incredibly stark statistic. It is a major determinant of the deterioration of housing affordability.

However, there are important considerations around the protection of the natural environment that need to be considered too. It will therefore be interesting to see how the reforms to planning develop and what their impact will be on house prices and their affordability.

Articles

Statistics

Questions

  1. Explain the difference between a rise in the rate of house price inflation a rise in the level of house prices.
  2. Explain the difference between nominal and real house prices.
  3. If nominal house prices rise can real house price fall? Explain your answer.
  4. What do you understand by the terms instructions to buy and instructions to sell?
  5. What factors are likely to affect the levels of instructions to buy and instructions to sell?
  6. How does the balance between instructions to buy and instructions to sell affect house prices?
  7. How can we differentiate between different housing markets? Illustrate your answer with examples.
  8. What metrics could be used to measure the affordability of housing?
  9. Discuss the argument that the deterioration of housing affordability is the result of market failure.
Posted on

Getting real with retail sales

In the third of our series on the distinction between nominal and real values we show its importance when analysing retail sales data. In the UK, such data are available from the Office for National Statistics. This blog revisits an earlier one, Nominal and real retail sales figures: interpreting the data, written in October 2023. We find that inflation-adjusted retail sales data reveal some stark patterns in the sector. They help contextualise some of the challenges faced by high streets up and down the UK.

The Retail Sales Index

Retail sales relate to spending on items such as food, clothing, footwear and household goods. They involve sales by retailers directly to final consumers, whether in store or online. Spending on services such as holidays, air fares and train tickets, insurance, banking, hotels and restaurants are not included, as are sales of motor vehicles. The Retail Sales Index for Great Britain is based on a monthly survey of around 5000 retailers across England, Scotland and Wales and is thought to capture around three-quarters of turnover in the retail industry.

Estimates of retail sales are published in index form. There are two indices published by the ONS: a value and volume measure. The value index reflects the total turnover of business, while the volume index adjusts the value index for price changes. Hence, the value estimates are nominal, while the volume estimates are real. The key point here is that the nominal estimates reflect both price and volume changes, whereas the real estimates adjust for price movements to capture only volume changes.

The headline ONS figures for May 2024 showed a rise by 2.9 per cent in the volume of retail sales, following a 1.8 per cent fall in April. In value terms, May saw a 3.3 per cent rise in retail sales following a 2.3 fall in March. Monthly changes can be quite volatile, even after seasonal adjustment, and sensitive to peculiar factors. For example, the poor weather in April 2024 helped to depress retail spending. It is, therefore, sensible to take a longer-term view when looking for clearer patterns in spending behaviour.

Growth of retail sales

Chart 1 plots the monthly value and volume of retail sales in Great Britain since 1996. (Click here to download a PowerPoint of the chart). In value terms, monthly spending in the retail sector has increased by 169 per cent since January 1996, whereas in volume terms, spending has increased by 77 per cent. Another way of thinking about this is in terms of the average annual rate of increase. This shows that the value of spending has risen at an annual rate of 3.5 per cent while the volume of spending has risen at an annual rate of 2.0 per cent. This difference is to be expected in the presence of rising prices, since nominal growth, as we have just noted, reflects both price and volume changes.

Chart 1 helps to identify two periods where the volume of retail spending ceased to grow. The first of these is following the global financial crisis of the late 2000s. The period from 2008 to 2013 saw the volume of retail sales stagnate and flatline, with a recovery in volumes only really starting to take hold in 2014. Yet in nominal terms retail sales grew by around 14 per cent.

The second of the two periods is from 2021. Chart 2 helps to demonstrates the extent of the struggles of the retail sector in this period. It shows a significant divergence between the volume and value of retail sales. Indeed, between April 2021 and October 2023, while the value of retail sales increased by 8.0 per cent the volume of retail sales fell by 11.0 per cent.

The recent value-volume divergence reflects the inflation shock that began to emerge in 2021. This saw consumer prices, as measured by the Consumer Prices Index (CPI), rise across 2022 and 2023 by 9.1 per cent and 7.3 per cent respectively, with the annual rate of CPI inflation hitting 11.1 per cent in October 2022. Hence, while inflation was a drag on the volume of spending it nonetheless meant that the value of spending continued to rise. Once more this demonstrates why understanding the distinction between nominal and real is important. (Click here to download a PowerPoint of the chart).

To illustrate the longer-term trend in the volume of retail spending alongside its volatility, Chart 3 plots yearly retail sales volumes and also their percentage change on the previous year.

The chart nicely captures the prolonged halt to retail sales growth following the global financial crisis, the fluctuations caused by COVID and then the sharp falls in the volume of retail spending in 2022 and 2023 as the effects of the inflationary shock on peoples’ finances bit sharply. This cost-of-living crisis significantly affected many people’s disposable income. (Click here to download a PowerPoint of the chart).

Categories of retail sales

We conclude by considering categories of retail spending. Chart 4 shows volumes of retail sales by four broad categories since 1996. (Click here to download a PowerPoint of the chart). These are food stores, predominantly non-food stores, non-store retail and automotive fuel (i.e. sales of petrol and diesel “at the pumps”).

Whilst all categories have seen an increase in their spending volumes over the period as a whole, there are stark differences in this rate of growth. Perhaps not surprisingly, the most rapid growth is in non-store retail. This includes online retailing, as well as market stalls and catalogues.

The volume of retail spending in the non-store sector has grown at an average annual rate over this period of 6.3 per cent, compared with 2.6 per cent for non-food stores, 1.2 per cent for predominantly food stores and 1.0 per cent for automotive fuels. The growth of non-store retail has been even more rapid since 2010, when the average annual rate of growth in the volume of purchases has been 10.2 per cent, compared to 1.8 per cent for non-food stores, 1.0 per cent for automotive fuels and zero growth for food stores.

If we focus on the most recent patterns in the categories of retail sales, we see that the monthly volume of spending in all categories except non-store retail is now lower than the average in 2019. Specifically, when compared to 2019 levels, the volume of spending in non-food stores in May 2024 was 2.6 per cent lower, while that in food stores was 4.4 per cent lower, and the volume of spending on automotive fuels was 10.8 per cent lower. In contrast, spending in non-store retail was 21.2 per cent higher. Yet this is not to imply that this sector has been immune to the pressures faced by their high-street counterparts. Although it is difficult to disentangle fully the effects of the pandemic and lockdowns on non-store retail sales data, the downward trajectory in the volume of retail sales in the sector that occurred as the economy ‘reopened’ in 2021 and 2022 continued into 2023 when purchases fell by 3.5 per cent.

Final thoughts

The retail sector is an incredibly important part of the economy. A recent research briefing from the House of Commons Library reports that there were 2.7 million jobs in the UK retail sector in 2022, equivalent to 8.6 per cent of the country’s jobs with 314 040 retail businesses as of January 2023. Yet the importance of the retail sector cannot be captured by these statistics alone. Some would argue that the very fabric and wellbeing of our towns and cities is affected by the wellbeing of the sector and, importantly, by structural changes that affect how people interact with retail.

Articles

Research Briefing

Statistical bulletin

Data

Questions

  1. Which of the following is/are not counted in the UK retail sales data: (i) purchase of furniture from a department store; (ii) weekly grocery shop online; (iii) a stay at a hotel on holiday; (iv) a meal at your favourite café or restaurant?
  2. Why does an increase in the value of retail sales not necessarily mean that their volume has increased?
  3. In the presence of deflation, which will be higher: nominal or real growth rates?
  4. Discuss the factors that could explain the patterns in the volume of spending observed in the different categories of retail sales in Chart 4.
  5. Discuss what types of retail products might be more or less sensitive to changes in the macroeconomic environment.
  6. Conduct a survey of recent media reports to prepare a briefing discussing examples of retailers who have struggled or thrived in the recent economic environment.
  7. What do you understand by the concepts of ‘consumer confidence’ and ‘economic uncertainty’? How might these affect the volume of retail spending?
  8. Discuss the proposition that the retail sales data cast doubt on whether people are ‘forward-looking consumption smoothers’.