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How is consumer spending around Christmas 2023 likely to affect retailers?

Despite falls in headline inflation, predictions for Christmas consumer spending in 2023 remain downbeat. Families worry about household bills and the pressure of interest rate rises, while retailers are concerned about the supply of products, running costs and recent slowdowns in spending.

Christmas has long moved away from being a religious festival to a much more commercial and generally celebratory ‘holiday’ event or period. For some, it is unethical and far too commercial in a world of huge disparities and a sustainability crisis. But for retailers, as has been noted before at the Economics Observatory, the run-up to Christmas and New Year is a critical period in their annual performance.

The ‘golden quarter’ of October to December sees a large increase in sales for many retailers and a consequent surge in profits. Get it right and the financial year is a triumph; get it wrong and it’s a disaster, with damaged cash flow and profits, and unsold stock clogging up systems. So, what will Christmas 2023 be like for retailers and consumers?

How have the last few Christmas seasons turned out?

From a retailer and consumer standpoint, the last three Christmas seasons have been traumatic. The Covid-19 pandemic hit in early 2020, and Christmas 2020 became the lockdown Christmas. Online sales boomed, but physical stores were challenged severely. Despite high hopes for Christmas 2021, the rapid acceleration of the Omicron variant made it very difficult for shops. Problems in supply chains, a lack of consumer confidence and inflation at a ten-year high all took their toll. Surely 2022 had to be better.

But any hopes that retailers and consumers had for Christmas 2022, as vaccinations continued to roll out and Covid-19 became more manageable, were dealt a savage blow when Russia invaded Ukraine earlier in the year. A full-blown cost of living crisis ensued, inflation reached a 40-year high, interest rates reached a 15-year high, the full implications of Brexit began to bite, and both avian flu and adverse weather hit some supply chains.

The climate crisis and rising energy costs added to household bills, with families battered by the combined impact of these factors. While, as ever, some retailers did well, Christmas 2022 was arguably more difficult than 2021.

The political, economic and social picture in 2023 has not improved much. On the international stage, the war in Gaza has added to the already turbulent geopolitical situation. In the UK, the recent fall in the headline rate of inflation suggests at least some lessening of the macroeconomic impacts of combat abroad.

Of course, this only means that prices are rising less quickly. Many goods and services are still substantially more expensive this year than they were 12 months ago. The Chancellor’s Autumn Statement sought to lighten the mood. But retailers and consumers may not feel their lives and businesses are actually improving, and forecasts for next year are not great. Retail crime has become a national topic of concern. Christmas hopes are quite subdued.

What is the impact of the cost of living crisis?

At some level, the UK economy stabilised in 2023, and may have even improved. The energy crisis is nowhere near as problematic as it was, and inflation has more than halved from its peak (see Figure 1). But both elements still require consumers having to live with higher costs. If households have either a variable rate mortgage or a fixed-term mortgage coming to its end, then they will soon see the value of their monthly loan repayments going up. This is due to the repeated increases in the Bank of England’s baseline interest rate (see Figure 2).

Figure 1 shows the high level of inflation during 2022 and 2023. As mentioned, it has now begun to fall, mainly as the energy price rises of 2022 drop out of the annual figures. But the upward trend of the owner-occupied household (OOH) measure in the figure shows how housing costs have increased and put pressure on consumer budgets. Out of the fire and into the frying pan.

Figure 1: CPIH, OOH component and CPI annual inflation rates, 2013-23

Source: Consumer price inflation, UK – Office for National Statistics
Note: CPI = Consumer prices index; CPIH = Consumer Prices Index including owner occupiers' housing costs; OOH = Owner occupiers' housing costs

The response to this high level of inflation has been the regular increase in the Bank of England’s policy interest rate (see Figure 2). The aim of this has been to control inflation by reducing demand in the economy. The cost of borrowing for consumers and businesses has increased as a result. For households, the impact has been steadily increasing as the cost of new mortgages or servicing existing ones has grown.

Figure 2: Bank of England official bank rate, 2013-23

Source: Interest rates and Bank Rate | Bank of England

Inflation in itself can be damaging to household finances. But when combined with interest rate increases that affect mortgages, households and consumers really feel the pressure. That this happened in such a short time has been the driving force behind the cost of living crisis. It has been exacerbated by the lag of wages behind inflation, and it is only recently that wages are on average rising ahead of the headline rate of inflation (see Figure 3).

Figure 3: Real average weekly earnings single-month annual growth rates, seasonally adjusted, and CPIH annual rate, 2001-23

Source: Average weekly earnings in Great Britain – Office for National Statistics (

The net effect is that households have felt poorer very quickly. The Asda Income Tracker (see Figure 4) shows the sharp reverse in household disposable income that came in late 2021, as well as the depth of the reduction as the rising cost of living crisis hit. It is only in the last few months that this has reversed.

Figure 4: Asda Income Tracker, year-on-year change, 2015-23

Source: PowerPoint Presentation (

But these aggregate figures mask the true disparities. Figure 5, which again uses the Asda income tracker, shows the large disparity between household income increases/decreases in the period from September 2022 to September 2023, as well as their absolute positions. The depth of the crisis for large parts of the population is obvious. Those at the bottom of the income distribution face the tightest squeeze.

Figure 5: Asda Income Tracker

Source: PowerPoint Presentation (
Note: The growth rate for the second quintile should be interpreted with caution as this reflects the movement from negative to positive territory.

In times of high inflation, and with household incomes under such pressure, consumers act more carefully. The continued rise of discount retailers such as Lidl and Aldi is one illustration of this switching effect; the increased sales of retailer brand products and of frozen food in all food retailers are others.

With prices so high, the amount that people can afford to buy is reduced, even though the cost is higher. Figure 6 shows the difference in value and volume sales in recent years, with the clear impact of inflation and a tightening of purchasing. The figure is for food sales, but the same disparity can be found in non-food sectors.

With this relentless pressure on personal and household finances, and the importance of Christmas generally, it is no wonder that retailers are nervous ahead of Christmas 2023.

Figure 6: Food store volume and value sales, seasonally adjusted, 2019-23

Source: Retail sales, Great Britain – Office for National Statistics (

What will Christmas 2023 be like for consumers and retailers?

There seems to have been an early start to Christmas among retailers this year. But this has not necessarily attracted consumers. National data and commentators suggest that consumers have delayed spending, perhaps hoping for a bargain. Sales seem not to have risen as predicted, possibly a consequence of the very cold and wet weather along with higher petrol prices. Black Friday seems to have been inconsistent among businesses. While retailers hope for a good Christmas, the key phrases seem to vary between ‘cautious’ and ‘bleak’.

Consumer surveys have variable sample sizes, and consumers are often not the most reliable in this regard. But predictions for spending at Christmas appear to be depressed. Not all surveys are negative, but the balance tends to see spending as likely to be below last year. The accuracy of these predictions remains uncertain, especially in times of higher inflation, and they may simply reflect overall consumer sentiment which remains low, though a little ahead of its 2022 lowest point (see Figure 7).

Figure 7: UK consumer confidence indicator (GfK)

Source: UK consumer confidence (

For example, a Sensormatic IQ report suggests that 65% of their sample are likely to spend less this Christmas than a year ago. According to the analysis, the average reduction compared with last year is 30%. While these figures are subject to a degree of error, the trend is clear. The survey also suggests that between 2020 and 2023, the significance of price to consumers has risen rapidly. Consumers claim to favour shopping in-store (rather than online) for some Christmas items, so they can browse and find a deal (as well as due to fears of late delivery or package theft). For food, bulk online purchasing remains important and delivery slots for Christmas again are seeing high demand.

As with all this topic, generalisations can mask significant differences. As Figure 8 shows, different demographic groups are looking for different products. For retailers, understanding their market has become more vital than ever.

Figure 8: Top intended Christmas gift categories by demographic group

Source: UK Retail: Shopper Sentiment Report 2023 - Sensormatic | UK

Given the cost of living crisis and the pressure on incomes, spending may well focus on more affordable ‘treats’. This is known as the ‘lipstick effect’: in times of economic hardship, consumers forgo bigger, more costly items, instead choosing smaller, more affordable (and perhaps more personal) luxuries.

With such a background, and with a consumer sector that is cautious at best, retailers have been expressing concerns about the Christmas period. Many felt their worries were vindicated after the most recent national sales figures showed an unexpectedly low figure for retail sales in October 2023. With such concerns and so much uncertainty, it will be the most prepared and better-managed retailers that prosper.

In this regard, the retail management task focuses on getting the supply of products right, using promotional activity that attracts consumers and having the right price. Retailers cannot really afford to get the supply and pricing wrong. Early store signage and display is often combined with tailored and teaser advertisements before full launch. Consumer reactions to these are closely watched, as are actual sales. The ability to react quickly in whatever direction is vital.

More than ever this Christmas, retailers need to know what is being sold and when it is being sold – and be ready to replenish stock quickly if required. These tasks may well necessitate real-time data sharing. Waste also needs to be minimised (something that can be assisted by discounting and more dynamic pricing). Additional staff for the Christmas season in big retailers (such as Tesco, John Lewis and Sainsbury’s) could also play a key role. Where they can, retailers are also tying in consumers with membership or loyalty offers.

So, will it be a merry Christmas?

Christmas Day this year is on a Monday. As ever, the last preceding week will be a massive commercial event for retailers and consumers alike. Christmas Eve falls on a Sunday, which means that limited trading laws will apply in the UK (outside Scotland).

By then, most retailers will know how they have done. As ever, some will have done well, and others less so. Given the broader national economic situation, there may be more of the latter than the sector would wish for. But some groups will be unaffected, as in previous years, and most people will be trying their best to have a merry, albeit probably lower-spending, Christmas.

Where can I find out more?

  • The Office for National Statistics (ONS) publishes regular updates on its data series and a range of analyses of the trends and directions. The ONS is also adding to its standard data series with a range of experimental data sets.
  • The House of Commons Library contains a range of reports and briefing papers on topics mentioned in this article.
  • Consumer confidence is reported monthly by GfK.
  • In addition to setting the current bank rate, the Bank of England produces a range of data on consumer and business activity.
  • The British Retail Consortium provides a range of data on the sector, often in association with partners.
  • Many retailers, suppliers, analysts and other organisations interested in the retail sector publish a wide range of reports, for example, the Asda and Sensormatic data used in this article.

Who are the experts on this question?

  • Richard Davies
  • Huw Dixon
  • Michael McMahon
  • Leigh Sparks
  • Eleonora Pantano
Author: Leigh Sparks
Image: acceptfoto on iStock
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