Hopes of rate cut fade as economy takes off

INDICATIONS THAT the UK is experiencing a rapid economic recovery are increasing, with expectations of more cuts in interest rates dampened further yesterday by data showing the housing market revving up and high street sales rising again. Remaining hopes for another reduction in loan costs will rest on inflation figures today turning out to be even better than expected.

Official figures yesterday hinted at potential future cost pressures in industry from rising oil prices. A 30 per cent surge in the price of crude oil over 12 months, and 3.4 per cent during the month, took input prices paid by manufacturers up 0.6 per cent in June. Their year-on-year change, at minus 1 per cent, was the least negative in more than three years.

"Core" output prices charged edged up 0.1 per cent in June and were still 0.5 per cent lower than a year earlier, however. This suggested manufacturers were unable to pass on their cost increases, analysts said, and were likely to continue to cut other costs by shedding jobs.

But, outside industry, there were signs of a rapidly improving pace of activity. Halifax's latest report showed the rises in house prices in the second quarter of this year were the biggest since the height of the late 1980s boom, while in its monthly survey, the British Retail Consortium (BRC) said high street sales had improved again.

The value of total sales was up 4.5 per cent in the year to June, recovering from 2.4 per cent in May and a decline the previous month.

The BRC's comments were downbeat, as many retailers had begun their summer sales earlier than usual. Andrew Higginson, chairman of its economics committee, said: "One month's results need to be treated with caution. The underlying picture remains much the same and there is no danger of overheating."

The best performing sectors last month were footwear, children's clothes and - tying in with the upbeat housing market - DIY goods. The weather caught out the clothes shops. After a dismal start to the summer, they had already marked down seasonal stock by the time the sun started to shine.

Business also picked up in financial services, according to a separate Confederation of British Industry survey. The volume of business and profits climbed at their fastest rate since the end of 1996.