September UK retail sales slide past forecasts, add to BOE's rate hike dilemma

• On a month-over-month basis, UK retail sales fell by 0.4% in September, against expectations of a 0.1% contraction.
• The August figure was revised upward to 0.7% from 0.5%.
• On a year-over-year basis, sales increased 0.8% in September, short of the 1.0% forecast.
• The prior annual figure was revised higher to 2.7% from 2.4%.
• Excluding automobiles and fuel, monthly sales dropped 0.7%, far worse than the predicted 0.1% decline.
• The prior ex-auto month was revised from 0.6% to 0.9%.
• Year-over-year sales excluding autos and fuel rose 0.8% against an expected 1.5%.
• That prior ex-auto annual figure was revised to 2.9% from 2.7%.

September's retail sales data fell short of market expectations, declining 0.4% month-on-month compared with a forecast 0.1% drop. The prior month's reading was revised upward, now showing a 0.7% increase from 0.5%. Despite the monthly miss, the quarterly performance remains decent: retail sales volumes rose 0.7% in the third quarter relative to the second quarter.

Broad weakness across sectors was evident. Sales at supermarkets declined following growth in the preceding two months, while volumes at non-food stores contracted by 0.4%. Clothing retailers were also hurt by unseasonably warm September weather, which curbed appetite for autumn and winter collections.

There are also signs that consumers are turning more cautious, with some stores reporting lower footfall and reduced customer spending.

Ahead of the report, the market had priced in roughly 98% probability of a November rate hike, with December odds closer to 45%. Today's numbers are unlikely to disturb the November expectation, particularly in light of recent inflation figures. However, the data does make the case for a December increase less straightforward, with the market odds now around a coin flip.

The Bank of England faces a difficult balancing act. Inflation remains stubborn, and both the labour market and consumer spending offer less comfort about the economy's strength.

For now, a November rate hike still seems very likely. But the retail sales release gives policymakers further grounds to move cautiously beyond that.