UK Consumer Confidence Recovers in August Amid Slowing Inflation

People shop on Oxford Street in London on April 10, 2023. Anna Gordon/Reuters

Consumers in the UK have felt more confident about their finances in August amid slowing inflation, according to a key index.

The long-running GfK Consumer Confidence Barometer tracker show a five-point rise in consumer mood to -25 in August.

It puts consumer sentiment back to a path of recovery after the figure dropped from -24 to -30 during the wettest July on record which saw a slump in retails sales.

Compared to August last year, the level has climbed up by 19 points.

The GfK Consumer Confidence Barometer is a monthly survey that asks a sample of British residents how they view their own finances and the wider economy in the past and next 12 months.

While the figure has been mostly in the negative territory, it fell to a record low of -49 in September last year, shortly before inflation hit a record high of 11.1 percent.

More detailed figures show people were more confident about their own finances than the overall economy.

The score for personal financial situations over the past 12 months rose by five points to -15. For the next 12 months, the score edged up to -3, almost in the positive territory.

Regarding the general economic situation, the confidence score for the past 12 months was up by 6 points but remained strongly negative (-52). For the next 12 months, the mood recovered by 3 points to -30.

Major purchase index was at -24, eight points up from that of July.

Joe Staton, GfK’s client strategy director, said the index regained momentum “against a backdrop of falling core inflation, higher interest rates, and rising average weekly earnings.”

Mr. Staton said while the headline consumer confidence figure remains “strongly negative at -25, hopes for our personal financial situation for the coming year are heading back towards positive territory, a metric that is key to indicating the future financial position of households.

“This renewed optimism can also be seen in the similar turnaround for our view on the general economic outlook for the next 12 months, and the eight-point advance in major purchase intentions is potentially better news for retailers as we move into autumn. However, while the financial pulse of the nation is still weak, these signs of optimism are welcome during this challenging time for consumers across the UK,” he added.

According to the latest figures published by the  Office of National Statistics (ONS), the headline annual inflation figure has dropped to 6.8 percent in July, and core inflation has slowed to 6.9.

But regular pay during the second quarter has surged by 7.8 percent on last year, the biggest jump on record, stoking fears that inflation may not drop as fast as wished.

To bring inflation back to within 2 percent, the Bank of England BoE raised its overnight lending rate for the 14th time on Aug. 3, to 5.25 percent. Economists widely expects the BoE to hike the rate again in November.

However, mortgage rates have begun to fallen back down over the past month, Gabriella Dickens, an economist at Pantheon Macroeconomics, told the Financial Times that this and the fall in energy bills have boosted confidence.

Ruth Gregory, an economist at the consultancy Capital Economics, went future to suggest “the cost of living crisis is coming to an end,” although she cautioned the recovering confidence may by injured again if unemployment and interest rates climb up and house prices fall down, the report said.

CBI Industrial Trends Survey published on Tuesday show manufacturing output in the three months to August suffered the biggest fall since the COVID-19 pandemic with the level of order books below “normal,” suggest a “gloomy” outlook for manufacturers, CBI Principal Economist Martin Sartorius said at the time.

In August 2023, more manufacturers thought that output would fall over the next three months than thought it would rise. The difference was -3% of manufacturers, down from +9% in July.

ONS business survey data released on Thursday show that between Aug. 7 and Aug. 20, most businesses (38.8 percent) believed their overall performance will stay the same over the next 12 months, 36.2 percent expected an increase, 9.5 percent believed there will be a decrease, and a further 15.5 percent were not sure.

Meanwhile, Euro zone consumer confidence fell by 0.9 points in August to -17.