Consumer confidence in the UK has risen to its highest level in almost two years as the growth in wages begins to outstrip inflation, which has eased the cost-of-living pressures on households, if only modestly.
GfK said its index, which measures consumer sentiment, increased four points to -21 in September. That is the best level since January 2022, shortly before energy bills soared in the wake of the Russian invasion of Ukraine.
Even though the numbers were encouraging and beat economists' expectations, Joe Staton, client strategy director at GfK said it was important to keep the figures in perspective.
“While this month’s improved headline score is good news, it’s important to note many households are still struggling with the cost-of-living crisis and that economic conditions are tough,” he said.
“The reality is that consumer confidence remains suppressed, and the financial mood of the nation is still negative.”
Meanwhile, figures from the Office for National Statistics (ONS) on Friday showed that UK retail sales volumes were 0.4 per cent higher in August, partially recovering from a fall of 1.1 per cent in July, when poor weather kept people away from the UK's high streets.
Related to the inclement weather in July, non-store retailing, which is mostly online sales, fell by 1.3 per cent in August, after a jump of 1.9 per cent the month before.
Looking at the broader picture, sales volumes rose by 0.3 per cent in the three months to August, when compared with the previous three months, the ONS said.
Petrol and diesel sales volumes fell by 1.2 per cent in August, with retailers indicating the decline was a result of the sharp increase in fuel prices.
The consumer confidence and retail sales figures come at the end of a busy week for the UK economy.
On Wednesday, the latest inflation reading surprised many by showing a slight fall from 6.8 per cent in July to 6.7 per cent in August, which analysts believe gave five of the members of the Bank of England's rate-setting Monetary Policy Committee (MPC) the latitude to vote to keep interest rates on hold on Thursday.
But although inflation as measured by the Consumer Price Index (CPI) is falling, interest rates are on hold and consumer confidence is growing, economists point out there is a long way to go and the risks of recession and stagflation in the UK are very much alive.
"Despite the softer CPI numbers seen this week, and the relief many will feel from the Bank of England’s decision to keep interest rates on hold yesterday, consumers are still battling prices that are significantly higher than just a couple of years ago," said Stuart Cole, chief macro economist at Equiti Capital.
"And although wages are finally starting to outstrip inflation, it will be a long time before the drop in real living standards is recovered. Indeed signs of a weakening labour market and the downwards pressure this will subsequently place on wages also suggests it could take some consumers a very long time to close this gap, if at all.
"Many households on fixed-rate mortgages are yet to feel the full impact of the interest-rate rises delivered to date, despite yesterday’s pause.
"With UK consumption such a key driver of overall growth, whether or not the UK manages to avoid a mild recession will in large part depend upon consumer willingness to continue spending."