Retail sales go backwards as rate rises bite

Retail sales fell for the second consecutive month in February in a further sign that tightening credit conditions and pessimism about the economy are having an impact on consumers.

In February retail sales went backwards by 0.1% seasonally adjusted, the same fall as that recorded in January.

In original terms, that leaves retail turnover 7.5% higher in February 2008 than the same month in 2007.

Victorian retailers appears to be taking the brunt of increased consumer conservatism, with retail sales in the state dropping by 1.6% seasonally adjusted. The only other state to record a fall in sales was Western Australia, where they fell 0.6%.

The largest increases in turnover were enjoyed by retailers in the occurred in the Northern Territory and the Australian Capital Territory, both up 1.2%, and Queensland, up 0.9%.

Retailers in the household goods and hospitality sectors experienced the biggest drop in business with a 2.3% and 0.6% seasonally adjusted drop respectively, while clothing good retailers fared the best with a 1.6% increase.

Given the link between higher interest rates and consumer spending, the retail industry will be one of many with a keen interest in comments made by Reserve Bank Govenor Glenn Stevens today.

Stevens told a parliamentary committee that while current inflationary pressures in the economy required a strong response if they are to be kept under control, “the significant tightening in financial conditions that has occurred since mid 2007 is a strong response.”

He also said he expects an annualised CPI figure of 4% when the next inflation results are released on April 23. Viewed in light of his statement on Tuesday that the RBA won’t be surprised by a high CPI figure in April,  today’s comments suggest that an underlying CPI result of 1% for the quarter might not be enough to cause a further rate rise in May.

Stevens clearly thinks that the economy is responding to higher interest rates. “We do think, however, that demand growth in Australia is now in the process of moderating… our assessment is that a change in trend is occurring, and we are hearing that from businesses we talk to. A tightening in financial conditions, lower share prices and heightened concerns over the global financial problems will all have played a part in this change.”

On the markets today, at just after midday the S&P/ASX 200 is up 0.4% on yesterday’s close to 5633.1 after an initial 40 point drop in the first hour of trading.