UK retail sales were stronger than expected in the first two months of the year as wet weather prompted consumers to buy clothing and more goods from Internet stores.

The volume of goods sold in shops and online was unchanged last month after a 3.6% gain in January, which was revised up by 0.2 of a point, the Office for National Statistics said. Economists had expected a drop of 0.4% for February.

The figures suggest consumers are shaking off the pinch from the cost-of-living crisis. Prime Minister Rishi Sunak is hoping a cut in payroll taxes along with expectations that the Bank of England will start easing borrowing costs in the next months will add to consumer budgets ahead of a general election likely later this year.

“There was growth in clothing, which rebounded after recent falls as people invested in the new season’s collections, as well as department stores,” said Heather Bovill, a senior statistician at the ONS. “These were offset by falls in fuel sales, possibly affected by rising prices, and a reduction in food sales.”

Online retailers had their biggest boost in sales since July 2023 after the wettest February on record kept shoppers out of stores. Sales excluding fuel rose by 0.2% in the month, even stronger than the drop of 0.1% that economists had expected.

The pound stayed lower on the day, down 0.3% at US$1.2616, after the figures. That follows a 1% drop on Thursday as traders amped up bets on monetary easing after two of the Bank of England’s most hawkish policymakers withdrew their support for interest rate hikes.

“While there is growing evidence of a recovery in the first quarter of 2024, consumers are set to remain cautious about their spending ahead. The pressure on consumer spending is likely to ease this year as wage growth continues to surpass inflation. While overall consumer confidence stalled in March, the GfK’s measure tracking people’s attitude toward their own finances turned positive for the first time since December 2021.” Bloomberg economist Niraj Shah said.

The longer term trend remains difficult for retailers. From a year ago, sales fell 0.4% in February after a gain of 0.5% the month before. Those numbers too were slightly better than economists had expected, but retailers complain that soaring prices over the past few years means people are paying more to buy fewer goods.

Retail sales in February were around 1.9% higher than the average for December and January, a sign that a recovery is under way. Retail sales are almost certain to contribute to growth in the first quarter, unless March figures produce a drop of around 5%.

“Shoppers largely shrugged off the unusually wet weather, provided further evidence that a rebound in retail activity, and perhaps the wider economic recovery is underway,” said Alex Kerr, assistant economist at Capital Economics.

UK consumer confidence stalled in March, shedding some of the recovery in sentiment experienced in recent months, according to a GfK report Friday. But an index measuring people’s attitude toward their own finances rose to the highest since 2021.

With wages now outpacing prices, living standards are rising once again. Inflation has fallen from over 11% in 2022 to 3.4% last month and is on course to drop below the 2% Bank of England target by April.

Retailer Next Plc, whose performance is a closely watched indicator of consumer demand, expects profits to reach £1 billion this year, saying shoppers are set to take advantage of higher wages to spend more on fashion. 

“It has been a long time since we started a year in a more positive frame of mind,” Next CEO Simon Wolfson said Thursday.

The average worker could also get an extra £900 in annual tax savings this year, thanks to the two-point cut in national insurance contributions announced in the March budget, repeating a reduction that took effect in January. Around 27 million employees and two million self-employed workers are set to benefit.

“UK consumers remain upbeat about personal finances, even with ongoing higher borrowing costs,” said Neil Birrell, chief investment officer at Premier Miton Diversified Funds. “Although the figures do provide a mixed view of the economy, there is nothing in the numbers to dampen the enthusiasm over interest rate cuts coming through sooner rather than later.”

The British Retail Consortium said its measure of sales rose just 1.1% in February, the slowest pace in 18 months. Separate credit card data from Barclays showed spending grew at a significantly slower pace than inflation.

Retailers blamed Britain’s rainy weather for keeping shoppers away from high streets. Some parts of the UK experienced the wettest February since Met Office records began in 1836, while most of country saw below average sunshine levels.

“With clothing and department stores seeing particularly strong demand, vendors will hope that fruitful sales will continue as we enter the warmer months,” said Matt Jeffers, a managing director looking at retail for Accenture in the UK & Ireland.

  - Bloomberg