Hopes of a rebound in high street shopping were dashed yesterday by figures showing that shops saw their sales stagnate during August.
The volume of goods passing through the tills last month was unchanged after July's fall, which itself was revised down to 0.6 per cent, the steepest monthly decline in seven months.
The pound dropped more than 1 per cent against the dollar, more than any other currency, as analysts said the poor out-turn put a cut in interest rates back on the table. Philip Shaw, at Investec, said: "Today's figures are a stark reminder that the high street boom is over and that the next move in rates is likely to be down."
The stagnation in monthly sales was worse than the 0.3 per cent the City had expected and took the annual growth rate to a nine-year low of 0.8 per cent, the Office for National Statistics said. It echoed the message from surveys of retailers by the CBI and the British Retail Consortium that highlighted a drop in sales over the summer.
The weak annual growth rate in spending revived speculation that the Treasury would be forced to revise its ambitious forecast of GDP growth of 3.5 per cent this year. "The consumer sector remains very weak," James Knightley, at ING Financial Markets, said. "Further declines in house prices, high fuel costs, lingering concerns about tax rises and higher unemployment are unlikely to result in a significant turnaround any time soon."
The picture was confused by a split between food stores, which posted their largest fall for more than two years at 1.2 per cent, and the rest of the high street, which rose 0.8 per cent. Lorenzo Codogno, at Bank of America, said: "Consumer spending will continue to soften ... but there is no disaster in sight."
Household goods and department stores - seen as bellwethers for the consumer economy - reported a monthly rise, albeit compared with July's fall. But on an annual basis department store sales have fallen 2.1 per cent over the past year, while sales at household goods stores are 1.8 per cent down on a three-monthly basis. Michael Saunders, at Citigroup, said: "You have to wear rose-tinted spectacles to see any convincing signs of recovery in the data."
Some analysts said the Bank of England was unlikely to cut rates while inflation was heading further away from its 2 per cent target. Simon Rubinsohn, at the fund manager Gerrard, said: "We would highlight the prospect of inflation running close to 3 per cent before the year end as justification for inaction."
Richard Lambert, one of the external members of the Bank's Monetary Policy Committee, played down the significance of current high levels of inflation. "It's not today's inflation rate that drives interest rate decisions," he wrote in The Sun newspaper. "Rates take time to have an impact - so the Bank must judge where the economy might be heading, which is always uncertain."
There was a glimmer of hope from a survey of shopper numbers at Britain's main shopping centres. FootFall, the retail-traffic analysts, said visits rose 1.7 per cent in August compared with July, although they were almost 4 per cent down on the same month last year.
The stock market ignored the gloom to send share prices to a four-year high on the London market. The FTSE 100 closed up 36.1 points, or 0.7 per cent, at 5,383.5, its highest finish since September 2001.
The market rose as investors flocked to oil shares and miners aftera rise in commodity prices. However, consumer-related stocks slid on the back of the ONS data and the gloomy figures from Kingfisher and Next.
The FTSE's index of UK retailers fell 1.74 per cent, hit by a 3.9 per cent fall in Kingfisher shares and a 3.2 per cent drop in Next.Reuse content