Rate rise fears grow as retail sales bounce back

Britain's consumers flooded back to the shops in February, causing the largest one-month increase in retail sales since the millennium boom of January 2000, official figures showed yesterday.

Falling sales in December and January had raised fears that shoppers were tightening their belts, but the office for national statistics said last month's expansion was 1.5%, raising the annual rate of growth to a robust 5.9%.

Healthy spending should add to optimism that Britain's economy is on the mend after growth slowed to zero in the last quarter of 2001. Some City analysts were predicting yesterday that the Bank of England will have to raise interest rates as early as May to prevent strong demand creating a surge in inflation.

"As it is, we remain on course for a May hike," said Danny Gabay of JP Morgan, warning that yesterday's figures would ring alarm bells for the Bank of England's governor, Sir Eddie George. "Unemployment is falling again and sales are buoyant, borrowing is high and shows no sign of abating."

The Bank's monetary policy committee has been relying on a moderation in consumer demand to dampen inflation as the global economy recovers from the sharp downturn in the aftermath of September 11.

Yesterday's data raised fears that shoppers may not stop their spending spree of their own accord. "It does appear that the consumer is consuming with gay abandon," said Jeremy Batstone, head of research at Natwest Stockbrokers.

February's inflation figures, published earlier this week, showed pricing power still subdued, however, with strong competition preventing retailers from taking advantage of renewed demand to push up prices in the shops.

Declining retail sales in December and January had puzzled economists - coming despite strong consumer credit figures, continued low unemployment and a booming property market.

February's strong performance by retailers appeared to be a resumption of the buoyant spending seen in the run-up to Christmas.

"The weakness of previous months' sales sat uncomfortably against a background of firm confidence, rising employment, heavy borrowing and a rampant housing market," said Philip Shaw of Investec Bank.

Much of the resurgence in sales last month was driven by the clothing and shoes sector, which saw booming year-on- year growth of 11.3% - more than double the rate a month earlier, when less generous January sales than in 2001 depressed spending.

Analysts said the unseasonally warm weather in February could also have boosted spending by tempting shoppers into buying their spring wardrobes earlier than usual.

Statisticians said the Queen's golden jubilee had given retail sales a boost too, by sparking a mini-boom in mail order memorabilia. Annual growth in catalogue shopping was running at 13.4% last month, its highest level since records began in 1986.

Household goods were another area of strong growth, with sales up 8% year on year as consumers spruced up their homes for spring.