The Invisible Consumer

According to official data from the ONS, the seasonally adjusted volume of retail sales increased by 1.9 per cent in the first half of this year, reaching an annual rate of £246.1 bn. The failure of the figures to account for the explosion in internet sales, however, implies that the true figure may stand at up to 3.3 per cent - far higher than the official estimate.

The ONS computes the monthly Retail Sales Index using data from the Retail Sales Inquiry - a survey conducted on a sample of 5,000 UK businesses. The index is considered to be one of the key indicators of the country> '> s economic health, as the consumer economy remains to be one of the most important determinants of economic growth and interest rate behaviour.

Over the past half decade, consumer spending has driven the economy, causing retail sales to outstrip historical levels. This year, spending cooled markedly, contributing significantly to the decline in the annual rate of economic growth to only 1.5 per cent in the second quarter - its lowest in more than twelve years.

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Although the ONS figures provide an important insight into the state of the consumer economy, they suffer from a backward-looking tendency. The figures include retail sales for all business outlets and sales by mail order but fail to account fully for the modern phenomenon of internet shopping - which is growing rapidly.

We have tried to account for this gap and have produced estimates which show that the share of internet sales in the retail sales index rose from 2.8 per cent in 2002 to 8.8 per cent in 2005. This was accompanied by a 0.6 per cent fall in the share of sales by mail order houses, such that the overall share of internet and mail order sales increased by 4.8 per cent over the period. The results suggest that internet sales rose by about a third from the annual rate of £15.4 billion in the first half of 2004 to a £20.5 billion annual rate in the first half of 2005. If all of this can be considered as additional to official retail sales, then total retail sales including the internet would have risen at a much faster rate than that calculated by the ONS.

In anticipation that the retail figures published by the ONS this month will continue to show signs of weakness, many are predicting a quarter point cut in interest rates in November. We believe, however, that inflationary pressures from oil prices and bank charges, upward revisions to earnings data and the growing demand of the invisible consumer make this unlikely and unnecessary.

By Jaspreet Sehmi, from the Centre for Economics and Business Research