Spending on `big ticket' household items leaps 11% and beats forecast

A SURGE in spending on household goods and a record inflow of tax receipts confirmed the strength of the consumer economy, according to figures out yesterday.

Spending on "big ticket" items leapt by more than 11 per cent compared with a year ago, helping retail sales grow 3.6 per cent, well ahead of a forecast 2.8 per cent.

The strong data complete a triumvirate of figures this week showing a rise in commodity prices and a tightening labour market - three of the four factors cited by the Bank of England when it raised rates last week. Figures on the booming housing market - the fourth factor - will come at the beginning of next month.

Household goods have a strong relationship with house price inflation so yesterday's figures give a strong pointer towards the trend in the property market. Meanwhile, the public sector net cash requirement in August was pounds 200m, the lowest for an August since 1988, on the back of a surge in tax receipts.

Public finances are on track to record a second consecutive full-year surplus of several billion pounds, compared with a pounds 4.5bn deficit projected in the March Budget.

David Coleman, an economist at CIBC World Markets, said the sales data was significant because the debate over rates was focused on the strength in the housing market. "Household goods reacted quite strongly during the summer and that will perhaps reinforce some concern that the Bank may do a bit more this year," he said.

But Neil Parker of the Royal Bank of Scotland said the increase was due to price-cutting, and that there was little sign of inflation on the high street.

Separate figures showed engineering pay settlements held fast at 2.5 per cent in the three months to August for the third month in a row, showing there was little pay pressure in industry.

Jeremy Hawkins, of Bank of America, said that both the sales and finances data provided the "perfect backdrop" to the Chancellor's bullish predictions for the UK economy.

The pound rose on the foreign exchanges, highlighting the division between the booming domestic economy and a beleaguered export-driven manufacturing sector suffering from the strong sterling.

Last night Sushil Wadhwani, a member of the Bank's Monetary Policy Committee, said he was aware of the "very considerable pain" many sectors of the economy were enduring from the value of the pound. Speaking on the seventh anniversary of Black Wednesday, when sterling crashed out of the Exchange Rate Mechanism, Dr Wadhwani threw doubt on one of the assumptions behind the MPC's discussion on rates, that sterling would decline in line with market rate differential and depreciate by 6.5 per cent.

In a lecture at the London School of Economics, Dr Wadhwani said he did not want to "justify" the level of sterling as "appropriate". "There is no doubt in my mind that the level inflicts considerable pain on many sectors of the economy," he said. He said that assuming the exchange rate remained constant, inflation could be as much as 0.4 per cent lower, which would give room for further rate cuts. He said an alternative model for exchange rates showed there were good reasons for sterling's "puzzling" rise.