Spending triggers inflation fears

Buoyant consumer spending is bringing the threat of higher inflation and imports, while the strong pound has started to hit exports. So official figures on retail prices and the latest CBI survey of industry suggested yesterday.

Rising prices on the high street meant the target measure of inflation did not edge down in November, disappointing some economists. Many believe interest rates should go up if the Government wants to hit its inflation target. Separately, the CBI reported that the rise in the exchange rate had taken export orders to their lowest for nearly three years. It predicted a ballooning balance of payments deficit next year.

"It is a weaker form of the classic British pattern of rising inflation and a balance of payments gap, although we do have a better performance by UK companies now," said Sudhir Junankar, a CBI economist.

Eddie George, Governor of the Bank of England, speaking in Lisbon the evening after Wednesday's monetary meeting, repeated his view that base rates need to rise. "The sooner the question is addressed, the better," he said, although he added that rates would not have to go much higher.

Most City experts believe that although the Governor did not persuade Kenneth Clarke to take his advice this week, the Chancellor will be forced to act in January or February.

The Treasury said November's 3.3 per cent inflation on the target measure was likely to fall during the next few months, as a period of falling prices last year dropped out of the 12-month rate.

However, the details of yesterday's figures suggested that retailers might be trying to increase their margins in the face of strong consumer demand. Prices for household goods increased by 1 per cent during the month, and clothing and footwear prices were up 1.1 per cent following a record 5.2 per cent increase in September.

The price of leisure goods increased by 0.6 per cent. Motoring costs fell in November, but not as much as a year earlier. Service prices rose little during the month but are trending upwards.

Lower food prices off-set much of the damage, falling 0.4 per cent during November to a level only 1.5 per cent above a year earlier. Meat prices fell sharply, especially pork and poultry, reversing some of the big increases triggered by the beef crisis.

Concerns about inflation were increased by a jump in the balance of manufacturers planning to raise their prices, from 8 per cent to 12 per cent. The CBI's survey showed price expectations have jumped to their highest since March after several extremely subdued months.

"Manufacturers seem to have set their heart on new year price rises," said John O'Sullivan at NatWest Markets.