Minutes of the only monetary meeting between Gordon Brown, Chancellor of the Exchequer, and Eddie George, Governor of the Bank of England, at the start of May showed the Bank was then seeking a half-point increase in the cost of borrowing to keep inflation on target.
Interest rates have since risen by that much to 6.5 per cent. But analysts said yesterday the Bank would need to push them still higher, even though Mr George had admitted there was a dilemma over rates because of the strong pound.
They drew some comfort from the Chancellor's statement in the minutes, released yesterday, that he "was determined to take action in the forthcoming Budget that would encourage more balanced economic growth".
This was read as a signal of planned tax increases to take some of the pressure off interest rates and the pound, easing the policy dilemma. But it did not alter the general conclusion that base rates could reach 7 per cent later this year.
The volume of retail sales surged by 1.1 per cent in May according to official figures yesterday. Their year-on-year growth climbed to 5.3 per cent, the highest since July 1988.
"There is a palpable post-election effect evident in the data, with retailers reporting a bumper bank holiday weekend immediately after the poll," said John O'Sullivan, an economist at NatWest Markets.
Others suggested the Alliance & Leicester flotation had had an impact. A quarter of the free shares were sold at the end of April.
"Whatever the reason, consumers are very confident at the moment. These are not freak figures," said James Barty at Deutsche Morgan Grenfell.
There were strong gains during the month in most categories, with the biggest jump in household goods. Sales of these, clothing and non-store retailing, mainly mail order, have all reached annual growth rates above 8 per cent.
Food sales are more sluggish in year-on-year terms. But they have picked up sharply in recent months and jumped 1.2 per cent in May. The consolation in the figures was that there was no fresh sign of a pick-up in inflation on the high street. Price competition between retailers still appears to be pretty stiff.
Even the City economists who have emphasised the strong pound and sluggish growth in industry as a reason for not increasing interest rates conceded that yesterday's figures had tipped the balance.
"This surge in sales will alter the policy calculation," said Simon Briscoe, chief economist at Nikko Europe.
Michael Saunders at Salomon Brothers warned that consumers could find themselves in the firing line for tax increases next month.
He said this would help ease fears that the current combination of policy was boosting the exchange rate and favouring consumers at the expense of exporters.
But few analysts reckoned the Government's manifesto pledges would allow it to raise the tax burden enough to take all the inflationary steam out of the economy.
The evidence that fears of excessive consumer spending growth are coming true took shares lower yesterday. The FTSE 100 index ended just over 25 points lower at 4,657.Reuse content