Flash PMI indicates weakening output but prices easing | Retail sales remain above pre-Covid levels

The headline seasonally adjusted S&P Global / CIPS Flash UK PMI registered 52.8 in July, down from 53.7 in June and the lowest reading since February 2021. Any figure above 50.0 indicates an overall expansion of private sector business activity. The report said the slowdown in output growth mostly reflected softer demand, alongside ongoing capacity constraints arising from shortages of materials and staff.

On a more positive note, the survey indicated that input cost inflation eased considerably since June and was the lowest for ten months. Survey respondents commented on lower commodity prices and a stabilisation in fuel costs, but there were still widespread reports citing intense salary pressures.

Earlier, the Office for National Statistics revealed that retail sales volumes fell by 0.1% in June 2022. That followed a fall of 0.8% in May 2022, which was revised down from the fall of 0.5% previously reported. Sales volumes were 2.2% above their pre-coronavirus February 2020 levels, but 14.4% higher in value terms.

Adrian Lowery, financial analyst at investing and coaching platform Bestinvest, comments:

“The PMI reading was predictably downbeat with S&P Global noting that the reading is consistent with 0.2% GDP growth in July. The report also noted that some post-lockdown pent-up demand for vehicles and for travel and tourism is still working its way through the system, suggesting that activity could drop off further this summer and into the autumn. A prognosis supported by manufacturing order books deteriorating for the first time in 18 months.

“There was however some welcome news on price pressures, with input costs growing at the slowest rate since last September.

“As for retail sales, the drop of 0.1% for June was less than the 0.3% fall expected, with the ONS noting that there was a boost from the Queen’s Jubilee celebrations. The downgrade for May is quite severe, and the consequences of consumer prices inflation are visible in a distinct trend from March 2021, with sales volumes heading downwards while sales values head upwards. Compared with the same period a year earlier, retail sales volumes fell by 5.5% in the three months to June 2022, while sales values rose by 4.4%.

“However, it is significant that sales volumes are still 2.2% up on February 2020 (before Covid hit) and about level with the average for summer 2021. In other words we’re not buying less than we were before Covid or before inflation started to run away. So this isn’t a retail bloodbath, even in sales volumes.”

Implications for interest rates

“With data this week showing inflation slightly higher than expected at 9.4%, the Bank of England is determined to re-establish its monetary credibility. The monetary policy committee’s task of bringing inflation back down towards the 2% target rate as soon as is sensibly possible, is made more tricky by weak signals from the real economy. If a severe downturn seems unlikely, the MPC has more room to tighten monetary policy as necessary.

“In this sense, positive signs for the real economy at the moment – such as the apparently robust labour market - can be ambiguous ones for household finances, as they make it easier for the Bank of England to hike rates, and a 0.5% increase to bank rate at the 4 August MPC meeting more likely.

“Today’s data does not look like it should swing the needle significantly either way.”