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| Retail shock prompts rate dilemma | Retail shock prompts rate dilemma |
| (about 1 hour later) | |
| A record level of retail spending in May has provided a respite from gloomy economic predictions, but it has also fanned fears of higher interest rates. | A record level of retail spending in May has provided a respite from gloomy economic predictions, but it has also fanned fears of higher interest rates. |
| Sales rose by 3.5% during May, the strongest monthly growth since January 1986, statistical office figures show. | Sales rose by 3.5% during May, the strongest monthly growth since January 1986, statistical office figures show. |
| Shocked analysts said the figures ran contrary to signs of a slowing economy and weak consumer confidence. | Shocked analysts said the figures ran contrary to signs of a slowing economy and weak consumer confidence. |
| Earlier, the Bank of England warned it would act to rein in inflation and said the UK was heading for difficult times. | |
| The Bank of England's governor, Mervyn King, said the UK was facing its "most difficult economic challenge for two decades". | The Bank of England's governor, Mervyn King, said the UK was facing its "most difficult economic challenge for two decades". |
| Mervyn King talks about how some households will find life harder | Mervyn King talks about how some households will find life harder |
| Speaking at the Mansion House in London on Wednesday night, Mr King made it clear that inflation was set to rise, while growth and house prices were likely to fall. | Speaking at the Mansion House in London on Wednesday night, Mr King made it clear that inflation was set to rise, while growth and house prices were likely to fall. |
| Mr King also warned that real take-home pay would stagnate, making life difficult for some families. | Mr King also warned that real take-home pay would stagnate, making life difficult for some families. |
| 'Different plane' | 'Different plane' |
| Analysts and companies have been echoing these negative sentiments in recent weeks, with mortgage providers such as HBOS forecasting a 9% drop in house prices, which is why the retail sales figures came as such a shock. | Analysts and companies have been echoing these negative sentiments in recent weeks, with mortgage providers such as HBOS forecasting a 9% drop in house prices, which is why the retail sales figures came as such a shock. |
| "I'm staggered," said Philip Shaw, chief economist at Investec. "The figures are on a completely different plane compared to what markets were expecting." | "I'm staggered," said Philip Shaw, chief economist at Investec. "The figures are on a completely different plane compared to what markets were expecting." |
| Unfortunately this 'shop till we drop' attitude will sow the seeds of its own demise. The risk of rate rises followed by a recession has just gone up Ian Kernohan, Royal London Asset Management Bank governor offers bleak forecastWhy households are under pressure | Unfortunately this 'shop till we drop' attitude will sow the seeds of its own demise. The risk of rate rises followed by a recession has just gone up Ian Kernohan, Royal London Asset Management Bank governor offers bleak forecastWhy households are under pressure |
| Food sales rose 3.3% as people bought salads and stocked up for barbecues, while clothing sales jumped 9.2% as shoppers sought out new summer outfits. | Food sales rose 3.3% as people bought salads and stocked up for barbecues, while clothing sales jumped 9.2% as shoppers sought out new summer outfits. |
| The better-than-expected figures took the annual sales increase to 8.1%, the fastest rate since April 2002. | The better-than-expected figures took the annual sales increase to 8.1%, the fastest rate since April 2002. |
| Inflation, it seems, has become policymakers' biggest worry and not the state of the UK economy. | Inflation, it seems, has become policymakers' biggest worry and not the state of the UK economy. |
| "Today's very strong set of retail sales numbers suggests that, despite all the doom and gloom, the UK consumer continues to shop," said Ian Kernohan, economist at Royal London Asset Management. | "Today's very strong set of retail sales numbers suggests that, despite all the doom and gloom, the UK consumer continues to shop," said Ian Kernohan, economist at Royal London Asset Management. |
| "Unfortunately this 'shop till we drop' attitude will sow the seeds of its own demise. The risk of rate rises followed by a recession has just gone up." | "Unfortunately this 'shop till we drop' attitude will sow the seeds of its own demise. The risk of rate rises followed by a recession has just gone up." |
| 'Clear message' | |
| The fear is that even if the surge in consumer spending can be attributed to a spell of warm weather in May, high food and fuel prices will force the Bank of England to raise interest rates at a time when the UK economy is already slowing. | |
| On Wednesday, the BBC was told by senior industry sources that household energy bills could increase by as much as 40% this winter. | |
| That could mean households paying £400 more a year on average for their gas and electricity. An increase on that scale would be far more than analysts have predicted in recent months. | |
| If wage claims get out of hand then the MPC will have no hesitation in pushing interest rates up Howard Wheeldon,BGC Partners | |
| The effect of higher fuel prices can already be seen on the rate of inflation. | |
| The latest inflation figures showed that the rate of consumer price growth had accelerated to 3.3% in May, well above the government's target of 2%. | |
| At its last rate-setting meeting, the Bank of England's Monetary Policy Committee (MPC) voted eight-to-one to keep borrowing costs on hold at 5%. | At its last rate-setting meeting, the Bank of England's Monetary Policy Committee (MPC) voted eight-to-one to keep borrowing costs on hold at 5%. |
| In his speech on Wednesday night, Mr King said the MPC was "prepared to take whatever action is needed" to bring inflation back down to the government's 2% target. | In his speech on Wednesday night, Mr King said the MPC was "prepared to take whatever action is needed" to bring inflation back down to the government's 2% target. |
| "The message from the Bank of England governor is now very clear," said Howard Wheeldon of BGC Partners. | |
| "Learn to live with inflation, learn to accept that purchasing power will shrink and get real to a view that if wage claims get out of hand, then the MPC will have no hesitation in pushing interest rates up." | |
| Pay restraint | |
| However, Mr King added that monetary policy alone could not prevent the current effects of rising food and energy prices on living standards. | However, Mr King added that monetary policy alone could not prevent the current effects of rising food and energy prices on living standards. |
| Neither have interest rate cuts coaxed banks, which are currently re-evaluating risk and keeping a tight grasp on their balance sheet, to be more generous in their lending to house buyers. | |
| Chancellor of the Exchequer Alistair Darling has also warned about the perils of inflation. In his first Mansion House speech, he emphasised the need to tackle price growth. | Chancellor of the Exchequer Alistair Darling has also warned about the perils of inflation. In his first Mansion House speech, he emphasised the need to tackle price growth. |
| Mr Darling reiterated his call for pay restraint in both the private and public sectors, warning against a return to the spiralling rates of inflation last seen in the 1970s. | Mr Darling reiterated his call for pay restraint in both the private and public sectors, warning against a return to the spiralling rates of inflation last seen in the 1970s. |
| He also laid out plans to give the Bank of England new responsibilities for ensuring the UK's financial stability. | |
| Part of the reforms will include setting up a new Financial Stability Committee, which will guide the Bank's operations in this field. |