New fears for recovery as high street sales stall

Retailers' fears that the resilience of consumers would crack amid price rises and falling confidence appeared to be confirmed yesterday by a worrying new report from the CBI.

In an ominous sign for consumer confidence, the CBI Distributive Trades Panel said the number of retailers increasing prices hit a 20-year high this month, as those reporting a rise in sales hit an eight-month low. While 4 per cent of chains said their average selling prices fell in February, a massive 77 per cent of retailers lifted them. The net balance of 73 per cent of retailers raising prices was the highest since 1991, up from the 45 per cent in November.

The rise in prices was partly driven by the increase in VAT to 20 per cent on 4 January, but retailers are also passing on to consumers huge spikes in commodity prices, such as cotton, and the impact of rising freight rates and oil prices. As a result, the upward pressure on shop prices shows no sign of abating, with a balance of 74 per cent of retailers expecting to increase their average selling prices at a similar rate in March.

In a further blow for the high street, while 36 per cent of retailers reported a rise in sales between 28 January and 16 February, 30 per cent said they fell compared with the same period last year. In the worst performance since June, the net balance of 6 per cent was below expectations and contrasted with a positive balance of 37 per cent in January.

Lai Wah Co, the CBI's head of economic analysis, said: "The positive effect of seasonal discounting on the high street that previously boosted sales has now waned. Retail sales are likely to be more challenging over the coming months. At the same time prices are set to rise considerably as the VAT increase and the soaring cost of raw materials are passed on to shoppers."

This week, Andy Street, the managing director of John Lewis, the department store chain, warned the Bank of England against raising interest rates, saying it would make a "big difference" to consumer confidence.

The volume of sales was also down by 12 per cent, which the CBI described as "poor" for this time of year, and a fall of 11 per cent is expected next month.

Sales volumes were "weaker" across nearly all sub-sectors this month, but the worst performers were retailers of durable household goods, and hardware and DIY stores, which fell by 90 per cent and 82 per cent respectively.

Judith McKenna, the finance director of the supermarket Asda, said: "With family budgets under increasing pressure, many shoppers are putting the purchase of big-ticket items on hold for the time being."

Following a rise in retail recruitment between August and November, fewer chains are hiring staff, with a negative balance of 12 per cent saying that employment levels were down on a year ago.

Howard Archer, the chief European economist at IHS Global Insight, said: "The very real likelihood that the Bank of England will start to raise interest rates within the next few months is not good news for consumer spending prospects. Even if the Bank of England only edges interest rates up, it will affect consumer psychology as people are bound to see the move as the first in a series of hikes."