Shock boost to retail sales heightens fears higher interest rates on the way

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The Independent Online

Retail experts reacted with disbelief yesterday to official figures which indicated that sales last month climbed at the fastest rate in nearly 30 years, driven by record sales of food and clothes.

Most labelled the figures a "blip" and predicted worsening conditions on the high street during the rest of the year.

However, analysts also warned that the figures meant that an interest rate hike is more likely as the Bank of England looks to crack down on signs of inflation.

The Office for National Statistics said the volume of retail sales was up 3.5 per cent in May, the biggest month-on-month rise since its records began in 1986. Clothing and footwear retailers marked a 9.2 per cent rise in sales during the month.

Philip Shaw, chief economist at Investec, calculated that the overall rise was actually the highest since 1979, adding: "These numbers are extraordinary. It's not surprising there was a slight increase, but the scale of this has taken everyone by surprise." Mr Shaw added: "The MPC is aware that the retail sales series is potentially volatile and is unlikely to react to a knee-jerk fashion to May's numbers, but there has to be a feeling that the odds of a rate hike this year have shortened."

Howard Archer, chief European and UK economist of Global Insight, agreed, saying that "the sheer strength of the rise in retail sales in May ... clearly shortens the odds of an interest rate hike before long".

A British Retail Consortium spokesman, however, was not surprised by the figures. "We had a couple of poor months, but the sun came out in May, and so did the shoppers. It doesn't indicate any change in the fundamentals, people are still very nervous about the prospects for the year."

The sales were 8.1 per cent higher than last year, when a string of unusually wet months caused havoc on the high street. Tarlok Teji, head of retail at Deloitte, said: "May 2007 was a very poor month, and therefore it is perhaps not surprising to see an increase in sales for May 2008."

He added that retailers had heavily discounted their stock last month "and this, along with some fine weather, brought shoppers back to the high street".

The Bank of England has painted a different picture this month as it reported that consumption growth was at its weakest pace since the autumn of 2005. Economists yesterday agreed the numbers were likely to be a blip, as consumers will increasingly feel the pinch from rising energy and food bills as well as rising mortgage costs in the wake of the credit crunch.

"The longer term picture is one of falling consumer spending and declining sales. Retailers will most certainly have made the most of May but will be preparing for tougher times to come," Mr Teji said.

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