The combination of booming volumes and low prices meant none of the City's interest rate hawks or doves shifted from their respective perches yesterday. But the fact the recent Bank of England Inflation Report had warned of the likely need for higher interest rates sent the pound close to the DM3 level for the first time since the summer.
"These figures were much too strong. They should be enough to persuade the Monetary Policy Committee (MPC) to move next month," said David Walton, an economist at Goldman Sachs.
Ken Wattret at Paribas agreed that a rate rise might come as early as March. "This was the fastest growth since those days of red braces and Filofaxes in the summer of 1988."
But other analysts said the soaring volume of goods sold had no implications for policy because consumers had needed the encouragement of price cuts.
Simon Briscoe at Nikko Europe said: "Strong sales are the result of low prices, not the precursor to higher inflation." He predicted sales volumes would fall back this month as retailers raised prices.
Rob Hayward, of Bank of America, added: "We pretty much knew this was going to be a strong number and it's come out a little higher than had been anticipated. But the big picture remains that we are looking for some sort of slowdown in the future. You have to look at what is going to happen to consumer spending in the future."
Today will bring an opportunity for members of the MPC, whose vote was split narrowly in favour of leaving rates unchanged in January and February, to give their latest views. Four - two in each camp - will give evidence to MPs on the Treasury Select Committee.
The volume of retail sales jumped by 1.8 per cent in January, and a small fall during December was revised away.
The annual growth rate climbed from 5.5 per cent to 6.9 per cent last month. In the latest three months - a better indicator of the trend - the year-on-year growth rate increased to 5.7 per cent.
The value of sales reached nearly pounds 13bn during the month, and was 6.5 per cent higher during the latest three months than a year earlier.
One of the strongest components in January was the volume of food sold. It jumped by 2.1 per cent, an unusually strong rise, especially coming after Christmas.
Sales volumes at department stores were also unusually buoyant, up 3.2 per cent in January. Clothing and household goods - the two areas where there were particularly pronounced price discounts - rose somewhat less. They were up 1.3 per cent and 0.8 per cent respectively, although the annual growth rate for household goods remained the strongest of all at 12 per cent.
While the recent volatility of the official retail sales figures - which account for about a third of consumer spending - since September left City pundits cautious about putting too emphasis on the implications of the latest news. However, the financial markets took it as a clear sign that the odds on higher borrowing costs had increased.
The pound climbed two pfennigs to nearly DM3 in reaction before falling back to just under DM2.99. The gilts market fell sharply and the futures market retreated from its earlier confidence that interest rates had already peaked.
The mood was not helped by a weak US Treasury bond market, where traders were reported to be profit-taking after the release of figures showing a much bigger than expected fall in prices at the factory gate in January. US producer prices dropped by 0.7 per cent during the month, the steepest drop since August 1993.Reuse content