Shock rise in retail spending reported

Jun 19 2008

The prospect of an interest rate hike loomed today after retail sales rose by an “astounding” 3.5% last month - the biggest since records began more than 20 years ago.

The rise in retail sales volumes between April and May was the biggest jump since January 1986 and flew in the face of a 0.1% drop forecast by most analysts.

It was also in stark contrast to two successive sales falls in previous months as a widespread consumer spending slowdown tightened its grip.

Shoppers’ confidence has been battered by the credit squeeze, soaring petrol and home energy bills, and a worsening housing market slowdown.

The warmest May ever was cited by the Office for National Statistics (ONS) as the reason for last month’s sales surge, with seasonal food such as barbecue and salad items and summer shoes and clothing enjoying record rises.

Economists expressed unanimous shock at the size of the leap, and warned it would keep alive the possibility of an interest rate rise as the Bank of England tries to dampen annual inflation. The measure hit a record 3.3% last month.

Referring to upcoming bank rate decisions, Bank of England Governor Mervyn King warned last night that the Monetary Policy Committee (MPC) would take “whatever action is needed” to return inflation to the 2% target.

Investec chief economist Philip Shaw said the sales data “stunned the markets”. He believed May’s exceptional weather produced the volatile change and led consumers on “a devil may care shopping binge”.

Mr Shaw said: “The MPC is aware that the retail sales series is potentially volatile and is unlikely to react to a knee-jerk fashion to May’s numbers, but there has to be a feeling that the odds of a rate hike this year have shortened.”

Global Insight’s Howard Archer added: “These retail sales figures are absolutely astounding, even allowing for the fact that food and perhaps the better weather lifting clothing sales were major factors.

“However, this was by no means the whole story as there was strength elsewhere.”

He said he still expected the prospects for consumer spending over the coming months to remain pretty bleak.

“Nevertheless, the sheer strength of the rise in retail sales in May....clearly shortens the odds of an interest rate hike before long,” Mr Archer added.

Sales volumes in food stores rose 3.3% from April to May, the highest rise since records began.

The textile, clothing and footwear sector enjoyed a 9.2% surge, also the biggest ever rise and mainly due to booming sales of summer ranges of clothing and shoes, the ONS said.

Overall sales volumes in May compared to a year ago were 8.1% ahead - the best performance since April 2002 - with food 4.7% up and textiles, food and clothing 11.2% better off.

In terms of sales values, the average weekly retail take was £5.3 billion last month, 7% higher than a year ago.

Other data from the high street earlier this month also suggested May’s better weather had tempted shoppers in off the streets.

The British Retail Consortium said like-for-like sales rose 1.9% during the month, with clothing sales up for the first time in nine months.

The ONS’s longer term sales volume measure, comparing performance between March and May with the previous three months, showed a 1.8% rise. This compared to a rise of 1.5% seen during February to April.

The data provided mixed news in terms of official inflation, which earlier this week was shown to have risen to a record 3.3% last month.

The overall price implied deflator reading - which measures whether prices are rising or falling year-on-year - was minus 0.3% last month, suggesting overall prices were lower in May than a year ago.

But the figure for the food sector showed an annual rise of 3.9%, the highest reading since July 1996.

The high street sector with the biggest fall was non-store retailing and repair - made up of predominantly mail order firms - which showed a 6.1% drop.

It was revealed this week that rate-setters at the Bank of England considered an immediate interest rate hike this month in order to dampen down consumer spending.

Ben May, from Capital Economics, said the ONS sales figures “defied gravity”.

He added: “May’s whopping rise in UK retail sales will certainly keep talk of possible interest rate hikes alive.”

The director-general of the British Retail Consortium, Stephen Robertson, said the official figures confirmed its own findings of sales growth led by food, drink and clothing in the May sunshine.

But he warned that economic fundamentals remained weak.

Mr Robertson said: “Much of this sales growth is the result of discounts and promotions and people are still reluctant to buy more expensive items, such as furniture and electricals.

“Personal finances are under severe and mounting pressure. Customers are concerned about jobs and the housing market. So it remains to be seen whether this sun-driven boost is sustained over the coming months.”