Retailers in best Christmas for 3 years

Britain's high street enjoyed its best Christmas for three years, defying expectations of a miserable festive season and increasing the risk of further interest rate rises.

Retail sales volumes leapt by 1.1% in December, official figures showed yesterday, smashing the City's forecast of a 0.5% increase. The sales surge, which was the biggest one-month increase for 18 months and the best December performance since 2003, pushed the year-on-year rate of increase up from 3.1 to 3.7%.

The star-performer was the household goods sector, where sales rocketed by 5.2%. But the figures also revealed the increasing popularity of internet shopping, with online sales up 9.1% on a year ago.

Evidence that retailers achieved bumper sales without cutting prices only added to the view that the Bank of England may be facing a prolonged battle against inflation. Prices were 0.2% higher in December than a year ago, the fourth consecutive monthly increase. This marked the longest period of price rises since 1999 and suggests the era of high-street deflation may be over.

"While a few quarters ago strong sales were happening against a background of heavy discounts, it appears now that consumers are still spending money despite a rising inflation environment," said Audrey Childe-Freeman, an economist at CIBC World Markets. "The overall situation is likely to create further inflation concern at the Bank of England and it makes a further rate hike, possibly in February, very likely."

Many experts had warned of a poor trading environment in the run-up to Christmas, as shoppers failed to hit the high street. However, sales improved once consumers started splurging on presents, food and drink just days ahead of Christmas, while online sales jumped to record levels.

The fortunes of individual retailers this Christmas has been mixed, with sales dropping at Woolworths and HMV while Tesco and John Lewis performed well.

Paul Clarke, director of retail and wholesale at Barclays business banking, predicted 2007 would see most retailers struggling. "Three interest rate rises in six months will not have done a lot for consumer confidence, and with utilities costs and rent prices remaining high, the coming months may prove tough," he said.

"Those retailers who have a good strategy, do their bit for the environment and adopt a multi-channel approach, embracing the opportunities presented by the internet, will undoubtedly fare best in 2007."

Tim Besley, a member of the Bank's Monetary Policy Committee, added to interest rate fears, highlighting the danger of inflation-busting pay increases. "We will do whatever it takes to return inflation to target, and that means all wage and price setters behaving responsibly," he said in an interview with the Cardiff-based Western Mail.

Meanwhile, the extraordinary strength of the housing market last year was reflected in record mortgage figures. The British Bankers' Association said high-street banks dished out £66.8bn in new home loans in 2006, up 20% on the previous year. Separate figures from the Building Societies Association (BSA) showed its members advanced £15.9bn, up 25% on 2005.

However, figures for December alone were weaker, suggesting November's interest-rate hike may be starting to bite. This week, the Royal Institution of Chartered Surveyors revealed a dramatic slowdown in house- price growth in December.

"It takes some months for the mortgage market to adjust to a rate rise, but these figures suggest that last year's rises are starting to take effect," said Adrian Coles, the BSA's director general. "It is likely that the impact of interest rate rises will continue to feed through, dampening demand."