Spending goes on rising but retailers are nervous: October factory gate inflation climbs to two-year high

CONSUMER spending continued to grow last month, but retailers are showing signs of nervousness as the Budget approaches, according to a new survey by the Confederation of British Industry. Official figures released yesterday showed a jump in consumer borrowing but suggested that inflation remains subdued.

The prices charged by manufacturers for their output rose by 0.2 per cent in October, taking the annual rate of factory gate inflation to 4 per cent from 4.2 per cent in the previous month, according to the Central Statistical Office. Excluding food, drink, tobacco and petrol prices, factory gate inflation rose to a two-year high of 3.2 per cent. This was largely the result of changes to the way the figures are adjusted for seasonal effects, which meant factory gate prices in September and October last year were lower than the CSO first thought.

Manufacturers' fuel and raw material prices fell by a seasonally adjusted 1.1 per cent in October, in part because food materials did not rise in price as normal.

The annual rate of input price inflation slumped from 3.8 to 0.9 per cent as the rise in input prices immediately following sterling's devaluation dropped out of the annual comparison. Economists said retailers might also be putting pressure on suppliers to lower prices.

The CBI's latest distributive trades survey suggests that retail sales volume is likely to have risen again in October following a 0.5 per cent increase in September. Almost a two-to-one majority of retailers reported that sales in October were up on a year earlier, slightly more than in the previous month.

The annual increase in sales is expected to accelerate again this month, although retailers have tended to be over-optimistic in recent months. Sales were low for the time of year in October but are expected to be normal this month.

More worryingly, the annual increase in orders placed with suppliers is expected to fall sharply this month, while stocks of unsold goods are forecast to rise further above desired levels. Retailers may be wary that the Budget could damage the traditionally strong Christmas trading period.

'Consumer uncertainty about the impact of the forthcoming Budget could also damage high-street trade over the coming weeks,' said Nigel Whittaker, chairman of the CBI distributive trades panel.

Figures from the Central Statistical Office showing a sharp jump in consumer borrowing provided further evidence that consumer spending is continuing to strengthen. Consumers borrowed a net pounds 489m in September from building societies and finance houses and on bank credit cards.

The figure was the highest for more than three and a half years, but was flattered slightly by lending to investors in certain business expansion schemes. Some pounds 106m was borrowed on bank credit cards following an pounds 89m repayment in August. After bad debts had been written off, consumer debt on this definition rose by pounds 382m to pounds 40,737m.

Ian Shepherdson, economist at Midland Global Markets, said consumer borrowing was rising at a trend rate of about pounds 250m a month, only half of which represented a real addition to the stock of consumer debt. 'September's increase is over-egging the pudding, but lending is still rising and may even be accelerating,' he added.

(Graph omitted)

View from City Road, page 34

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