Spending Your Way to Happiness

Blowout retail sales numbers for the UK in May are only further confusing the fixed-income markets. Surging sales in food and clothing challenge the bank of England's forecast that consumer spending is set to slow sharply this year, bringing inflation back toward the target rate of 2 percent.

The reported numbers are way above the markets expectations. The sales of clothing and footwear leapt 9.2 percent alone. This doesn't read like an economy that is rolling over. So what is going on?

The Office of National Statistics offered its own explanation, pointing out that seasonal food and clothing sales were helped by the warmer weather. We had one of the warmest Mays on record. There was also heavy discounting by the retailers to persuade shoppers into stores.

The immediate market reaction has been to buy sterling and drive up the short end of the yield curve. The problem is that the resilience of the official data seems to be at odds with industry surveys and measures of consumer sentiment. Why should Brits continue to shop when they tell market researchers with clipboards and pens that they feel miserable?

I suspect there will only be a true "collapse" in spending and consumption when people lose their jobs and no longer feel confident in meeting their living costs. The same phenomenon is apparent in the US retail sales data. We Anglo Saxons have become addicted to instant gratification through consumption.

This will be a hard habit to break, but central bankers shouldn't misread stronger retail numbers as evidence the economic vital signs are stabilizing. On the same day we have had Britain's largest mortgage lender warning house prices will fall 9 percent this year. News like that is enough to send you to the stores for a bit of retail therapy!

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