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Is the glass half empty? UK economy watchers certainly think so.

Retail sales rocketed in February, new data from the ONS showed today. Having shrunk by 0.5 per cent on the month in January, they turned out a 1.4 per cent rise in February, well above forecasts. The year-on-year rate came in at 3.7 per cent, against a rise of 1 per cent in January and also well above the 2.6 per cent expected.

But the ONS itself is keen to stress the rolling three-month average. By that measure, sales shrank by 1.4 per cent for the second month in a row. That’s the biggest drop since March 2010 and only the second fall since December 2013.

Analysts at Barclays write:

Overall, we believe that today’s print supports our forecast of a slowdown in Q1, with GDP likely growing less than expected by the BoE, which would contain some of the most hawkish members on the MPC.

While part of the slowdown could relate to excessive spending in Q4, the stabilisation of consumer spending over the two quarters taken jointly nonetheless contrasts with the uninterrupted increase in retail sales since 2013. We believe latest retail sales numbers are more clearly supportive of our forecast of a slowdown of private consumption from 0.7% q/q to 0.5% q/q, pushing overall GDP growth down from 0.7% to 0.4% q/q.

James Smith, an economist at ING, said:

Excluding fuel, sales rose 1.3% MoM, following two months of decline, taking the year-on-year rate to 4.1%. That’s fallen back from the end of 2016, when retail sales growth peaked at 7.7% YoY in October.

We interpret this as evidence that the spike in inflation is really starting to bite. Fuel and food prices have soared post-referendum, mainly owing to the fall in the value of the pound. Meanwhile, hiring intentions have fallen in the face of Brexit uncertainty, and that is likely to weigh on the outlook for wage growth. Inflation and wage growth are now running at the same 2.3% rate, and given that we expect CPI to peak above 3% later this year, real incomes are set to fall. We’d expect that to continue to weigh on spending and overall UK economic growth this year.

Sam Tombs at Pantheon Macroeconomics writes:

Consumers appear to have used credit in the autumn of 2016 to finance large purchases before prices jumped this year. Households goods sales therefore fell sharply in the winter, and now are recovering.

Retail sales remain on track to fall by around 1% quarter-on-quarter in Q1, barring an erratic movement in March. Retail sales account for around one-third of total consumer spending, so the latter will provide little—if any—support to GDP growth in Q1. Looking ahead, consumer spending likely will only edge up, given that consumers’ real wages now are falling, employment is growing only modestly and another wave of welfare spending cuts will hit households next month.

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