The amount of goods sold directly to UK consumers surged by more than expected last month, figures released by the Office for National Statistics on Friday show.
Retail sales volumes were estimated to have risen by 0.7 per cent in June 2023, following a rise of 0.1 per cent in May, the ONS said.
Experts had forecast a 0.2 per cent increase.
"Retail sales grew strongly, with food sales bouncing back from the effects of the extra bank holiday, partly helped by good weather, and department stores and furniture shops also having a strong month," said Grant Fitzner, chief economist at the ONS.
"However, these were partially offset by falls in fuel, garden centres and clothes shops.
"Growth still fell on an annual basis, but at its slowest rate since the beginning of the Ukraine war."
Soft landing?
Following a larger-than-expected fall in the headline rate of inflation to 7.9 per cent announced on Wednesday, economists are now pondering how the retail sales figures will be digested at the Bank of England.
"Whatever is encouraging this spending, the numbers suggest consumers remain willing to spend money when the opportunity presents itself," said Stuart Cole, chief macro economist at Equiti Capital.
"For the UK economy this is welcome, as robust domestic consumption will go a long way in helping to avoid the economy slipping into recession.
"But today’s numbers will likely have been read with some concern inside the Bank of England, as they suggest more work needs to be done in its efforts to dull demand in order to tame inflation, despite the softer Consumer Price Index figures seen this week.
"And they will do nothing to assuage concerns that the strong wages growth numbers that are still plaguing Bank of England policy are directly fuelling consumption, and by implication help to keep CPI elevated."
Others felt that while the retail sales and inflation numbers pointed to some resilient demand within the UK economy, the chances of a softer landing had improved.
"Given the resilience of the UK consumer, combined with softening inflation, the probability of a soft landing has returned to the table," said John Choong, equity analyst at InvestingReviews.co.uk.
"That said, investors will still have to be cautious. Larger volumes of spending could very well be the instigator that prevents inflation from falling back down to the Bank of England’s target of 2 per cent."
As such, many wondered if the higher retail sales volumes figures might tip the Bank of England back towards making a 0.5 per cent increase to interest rates, despite the lower inflation reading on Wednesday.
"With this higher than expected spending on the high street, UK consumers may well have just bought themselves a bit more mortgage pain," said Jamie Lennox, director at Dimora Mortgages.
"The Bank of England faces a difficult decision at its next meeting after what has been a week of mixed data.
"On the one hand, inflation fell at a quicker pace than expected, which will likely make for a more dovish Bank of England, but this stronger than expected retail sales data could favour the hawks," he added.
Consumer confidence slump
However, the market research firm GfK has found that consumer confidence in the UK has fallen for the first time in six months.
GfK's headline reading of consumer confidence fell to -30 this month from -24 in June, the first decline since January and below analysts' forecasts.
"Reality has started to bite and, as people continue to struggle to make ends meet, consumers will pull back from spending," said Joe Staton, client strategy director at GfK.
Tax take higher
Meanwhile, the UK government borrowed less than expected in June, according to the ONS.
Public sector net borrowing last month was £18.5 billion, £400 million less than in June last year, and less than the £21.1billion predicted by the government's independent forecaster, the Office for Budget Responsibility.
Nonetheless, the figure is the third-highest June borrowing since monthly records began in 1993.
The ONS said debt reached 100.8 per cent of GDP in June, the first time that had happened since 1961.
The UK's total debt pile is now £2.59 trillion.
Higher tax receipts and a substantial fall in debt interest payable compared with last June were largely offset by increased benefit payments and other costs.
In terms of the amount of tax coming into the Treasury's coffers, the ONS said there were £57.3 billon worth of tax receipts in June.
Income tax receipts rose by £2 billion, corporation tax receipts rose by £1.6 billion and VAT receipts rose by £1 billon.
"Heading into the next general election, the government will be wary that despite the successive fiscal rules, public sector debt has tripled over the past 20 years," said Michal Stelmach, senior economist at KPMG UK.
"While this is not unique to the UK, domestic vulnerabilities leave the current fiscal position more sensitive to shocks compared to its peers."
