Markets on edge ahead of key figures due this week: Analysts expect budget increases to push up inflation rate

SHARE prices and sterling face a nervous few days, with the markets due to deliver their verdict on several important sets of statistics.

The key day is likely to be Wednesday, which sees the announcement of the latest figures for retail prices, retail sales, unemployment, earnings and the public sector borrowing requirement .

Analysts expect the headline rate of retail price inflation to rise from December's 1.9 per cent due to the effect of last year's big reductions in mortgage rates dropping out of the index, and some budget tax increases coming in.

A figure below the expected range of 2.7 to 2.9 per cent would be welcomed, according to Ruth Lea, chief UK economist at Lehman Brothers, the investment bank.

'Last week's base rate cuts were regarded as a significant relaxation of the Government's inflationary stance. The markets will be very alert to the RPI figure, especially if the underlying earnings figures out at the same time are also creeping up.'

Weaker-than-expected figures on economic activity would be taken as a retrospective justification for the 0.25-point reduction in base rates, however. The vital statistic will be retail sales.

David Walton, senior economist at Goldman Sachs, said: 'Since retail sales dropped in December, they will be expected to have bounced back in January.'

Seasonal adjustment of these figures over the Christmas period makes them difficult to interpret.

Sales are seen as an important indication of whether consumers are holding back on spending in anticipation of April's tax increases.

'Another fall would give the markets serious pause for thought,' said Ms Lea.

The unemployment figures have also been proving difficult to analyse.

Although the joblessness total is on a firm downward trend, employment in manufacturing has also been falling.

The gains in employment have been mainly part-time work in low- pay sectors.

This means that a further fall in unemployment, expected to drop by 25,000 to 35,000, might not indicate a boost in economic confidence and spending.

With the information pouring out in a flood rather than the usual steady drip, there is even some speculation that disappointing figures on real economic activity could bring further reductions in interest rates.

However, many economists say this rumour is simply an indication of the nervousness likely to characterise the next few days' trading.