In July, UK retail sales increased by 0.6% compared to the previous month, beating the expected growth of 0.2%. Year-on-year, sales rose by 1.1%, which was slightly lower than the anticipated 1.3%. The previous month’s figures were revised to show a growth of 0.3% month-on-month and 0.9% year-on-year. When excluding cars and fuel, retail sales grew by 0.5% month-on-month, surpassing the expected 0.4%. On a year-over-year basis, this segment saw a 1.3% increase, slightly above the predicted 1.2%. The prior month’s growth was also adjusted to 0.6%.

Reasons for Retail Sector Growth

Retail sales volumes dropped by 0.6% when comparing the three months leading up to July 2025 with the prior three months. This decline ended a four-month growth period. Non-store retailers and clothing stores enjoyed significant growth, thanks to new products, decent weather, and increased consumer activity from the UEFA Women’s EURO 2025. Despite the positive retail numbers, the Bank of England is likely to center its focus on inflation and its wider economic impact. Reflecting on the July retail sales data from our current perspective in early September 2025, the monthly growth seems to be a temporary event. The positive figures were mainly influenced by one-off occurrences like the Women’s EURO tournament and favorable weather. The revised data from the previous month and the negative trend over three months point to a deeper underlying weakness among consumers. The main issue for UK markets is persistent inflation. The most recent figures for August 2025 show the headline Consumer Price Index (CPI) at 3.5%, well above the Bank of England’s target of 2%. This keeps pressure on the Bank to maintain a cautious stance before its next meeting later this month.

Inflation and Consumer Confidence Concerns

This indicates that the Bank of England will likely overlook the temporary strength in July’s retail report. Consumer confidence surveys support this view, with the latest GfK reading for August falling to -30, highlighting widespread pessimism among households about their finances. This disconnect between retail sales and overall consumer confidence is a concerning sign for the UK economy. As a result, we view the short-lived strength of the British pound after July’s data release as a fading moment and a missed selling chance. Strategies predicting further weakness of sterling against the US dollar should now be considered, as the UK’s stagflation seems to be deepening. Options that protect against GBP/USD falling below 1.22 in the coming months could be significant. This outlook also influences our view on UK equities, especially the domestically-focused FTSE 250 index. The strain on UK consumers indicates tough circumstances for companies in retail and hospitality sectors as autumn approaches. Maintaining bearish positions in these sectors, reminiscent of the challenging economic times in 2022 and 2023, should be evaluated. Create your live VT Markets account and start trading now.

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