UK consumer spending hits 5-year-low ahead of Brexit Budget

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British retailers have seen non-food sales fall to their lowest levels in over five years as higher inflation begins to eat into the pockets of consumers.

Non-food retail sales in the U.K. declined 0.4 percent on a like-for-like basis and 0.2 percent on a total basis over the three months to February, marking the first 3-month decline since November 2011.

The figures, compiled by the British Retail Consortium (BRC) and KPMG, come a day before U.K. Chancellor of the Exchequer Philip Hammond is to announce his first spending Budget since Britain voted to leave the EU.

"The persistent weak sales performance of several non-food categories points to an undeniable trend of cautious spending on non-essential items," noted Helen Dickinson, chief executive of the BRC.

As inflation continues to rise, this caution is expected to persist as shoppers focus on essentials such as food and fuel. Annual inflation in the OECD area jumped 2.3 percent in January 2017, the highest rate since April 2012, compared with 1.8 percent in December 2016, according to new data released Tuesday by the OECD.

"Tougher times are expected ahead. The impact of inflation on consumer spending will add further intensity to an already fiercely competitive environment in which the ability to adapt and innovate will be key to survival," said Dickinson.

Higher inflation has buoyed food and fuel retailers in recent months, with supermarkets seeing a 2 percent uplift and petrol seeing a 19.2 percent increase over the last year, according to research also released Tuesday by Barclaycard.

"Consumer spending remained strong in February, but the picture isn't wholly positive," said Paul Lockstone, managing director at Barclaycard.

"Rising prices were at least in part responsible for the highest growth in spend on essentials in nearly five years, with the phenomenon of 'shrinkflation', where people get less product for their money, also prompting consumers to row back on some areas of discretionary spending.

Food sales increased 0.6 percent on a like-for-like basis and 0.2 percent on a total basis over the three months to February 2017, continuing an upwards trend in essential spending.

Budgeting post-Brexit

This cautious approach to spending is expected to be reiterated by the British finance minister Wednesday when he outlines the U.K.'s Budget plans.

No great giveaways are expected. Hammond has already vowed to keep "enough in the tank" to cushion Britain as it undergoes potentially costly Brexit negotiations and any spending increases are likely to be offset by cuts elsewhere.

Analysts are anticipating a downwards revision of the U.K.'s macroeconomic forecast given Prime Minister Theresa May's commitment to a hard Brexit.

Not much in the tank for the UK: UBS

Speaking to CNBC Tuesday, John Wraith, head of U.K. rate strategy at UBS likened Hammond's plans to provide a Brexit buffer were "accounting fiction", given its already significant budget deficit.

The U.K. did, however, record better than expected tax receipts for 2016-17 in last year's Autumn Statement; money which could be used to support other spending initiatives

Dickinson urged the government to do more to support retailers and entice consumer spending.

"We hope to see a commitment from Government to lay a path to a truly sustainable business rates system that will give retailers the flexibility needed to invest and support their local communities."

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