UK consumers defy their budget worries to shop more

By Suban Abdulla

LONDON (Reuters) -British retail sales unexpectedly rose in September, according to official data published on Friday that contradicted signs that consumers were downbeat about possible tax rises ahead of the new government's first budget later this month.

Sales volumes increased by 0.3% in September, beating economists' expectations for a monthly 0.3% fall.

Combined with stronger gains in July and August, sales rose by 1.9% rise in the third quarter, the joint largest increase since mid-2021.

Telecoms and computers were the main drivers of non-food sales, with the sector jumping by almost 35% in monthly terms in September, the Office for National Statistics said.

Last month, Apple unveiled an artificial intelligence focused-iPhone 16 lineup as well as a sleeker Apple Watch and new AirPods.

"September’s rise ... suggests that while households may be concerned about possible tax rises in the Budget on Oct. 30, those fears are not feeding through to their spending decisions yet," said Alex Curr, UK economist at Capital Economics.

Sterling rose by a third of a cent against the U.S. dollar after the data was published.

Finance minister Rachel Reeves will set out her first plan for tax and spending at the end of October.

The new Labour government's warnings about the possible need for higher taxes and the tough economic outlook have contributed to consumer confidence plunging to a six-month low in September.

CONSUMERS REMAIN CAUTIOUS

British households are still struggling with higher living costs accelerated by a surge in energy prices following Russia's invasion of Ukraine in February 2022.

But the cost of living squeeze on households has slightly eased since then, with inflation falling below 2% from a peak of 11.1% in October 2022 and wages growing faster than prices for several months.

Figures published this week showed a cooling in the increases in wages, adding to expectations that the Bank of England will cut borrowing costs at its Nov. 7 meeting and possibly again in December.

The ONS said weaker sales growth in supermarkets, which were hit by bad weather and shoppers cutting back on spending on non-essential food items, partially offset the strong jump in tech stores.

"While there is somewhat of a recovery since the bounceback in consumer sentiment directly after the general election, this improvement remains fragile and unbalanced," Lisa Hooker, PwC's leader of industry for consumer markets, said.

Recent reports from UK retailers had shown robust foods sales.

Tesco, Britain's biggest grocer, lifted its annual profit forecast and said it was expecting a strong Christmas.

But consumers have remained reluctant to spend on discretionary items.

The boss of another supermarket chain Sainsbury's, which makes a quarter of its sales in non-food, told Reuters shoppers remained nervous about spending on bigger ticket items before the new government's first budget on Oct. 30.

The ONS said during the year to September 2024, sales volumes rose by 3.9%, the largest annual rise since February 2022.

(Reporting by Suban Abdulla; additional reporting by James Davey; editing by William Schomberg and Toby Chopra)