Consumer boom revives inflation fears

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Annual rise in house prices reaches highest level since the boom of 1988

Leading article: Painful hangover

Sir Edward George, the Governor of the Bank of England, said yesterday he was ready to raise interest rates to choke off the biggest consumer boom since the late 1980s.

His warning was issued as figures showed consumers had embarked on a massive spending and homebuying spree in the weeks before Christmas. A surge in house prices in December ended the best year for the housing market since 1988, Nationwide building society said. And a separate report, from the CBI employers' group, showed high-street retailers had enjoyed their best Christmas since 1987.

The figures are the latest sign that consumers have responded to the Bank of England's attempt to avert a recession by cutting interest rates seven times last year. But Sir Edward said the economy would soon be accelerating at a pace that was not sustainable if the global economy recovered before consumer spending slowed. He told the BBC World Service: "We may have to act to cause it [spending] to moderate if it does not happen of its own accord and that would mean putting up interest rates."

His remarks echoed a warning from Mervyn King, a deputy governor, that consumer spending could not continue to accelerate while manufacturing plunged further into recession. Economists fear that a surge in spending would trigger renewed prices rises that could threaten the Bank's inflation target.

In the City of London, analysts said the figures had dashed hopes of a rate cut next week. Michael Hume of the investment bank Lehman Brothers said: "It has put to bed any lingering thoughts that the Bank might be tempted to cut rates."

In its report, Nationwide said the price of the typical home jumped 1.9 per cent in December, taking the annual increase to 13.8 per cent. This made 2001 the best year for house price growth since 1988.

But the country's second-largest mortgage lender said it was confident that Britain would avoid the housing market crash that followed the Eighties boom. Alex Bannister, Nationwide's chief economist, said: "This year will see higher unemployment and a weaker economy, but the UK should avoid recession."

Meanwhile the CBI report indicated rising sales in every part of the high street compared with last year. On balance 48 per cent of retailers said sales had risen ­ the best result since Christmas 1987. Alastair Eperon, chairman of the CBI's survey panel and a director of Boots, said: "It is vital that consumer spending remains strong when other parts of the economy are so weak."

The figures came alongside growing expectations that some January sales may end early as shoppers clear the shelves of bargains. Marks & Spencer, seen as one of the big winners, will introduce some of its spring ranges in its 58 biggest stores on Monday because its sale has gone so well. Anecdotal evidence suggests M&S's clothing sales could be up by 15 per cent on last year, far ahead of expectations.

The department store chain John Lewis underlined the trend when it said non-food sales rose 17.3 per cent in the week to 29 December, pushed higher by late shopping before Christmas and the start of its New Year clearance.

Nigel Wreyford-Brown, the firm's merchandise director, said there was no evidence of a slowdown or overloading on credit cards. "We are taking steady orders on things like carpets, curtains and fitted kitchens for delivery in 10 weeks' time and it doesn't feel like shoppers are going to lose interest."

Retailers deny there might be an inflationary effect if the winter sales end early. One senior executive said: "Clothing only makes up a small part of the retail price index. Having one week at full price rather than in the sale would be just a blip for one month rather than something longer term."