Spending spurs rate fears

High street spending surged ahead last month despite the fuel crisis, reawakening fears of higher interest rates to dampen demand.

Figures published yesterday by the office for national statistics showed retail sales volumes grew 0.6% in September from August and were 4.6% higher than last year.

The figures were much stronger than expected in the City, where analysts had expected the fuel crisis to limit visits to the shops.

"There was no effect overall from the fuel crisis. Some stores said sales had dropped but others said they had risen," said an ONS statistician.

Economists said the figures were likely to worry hawks on the Bank of England's monetary policy committee who were banking on a slowdown in consumer demand to keep inflation in line with the government's 2.5% target.

Ciaran Barr of Deutsche Bank in London said that after robust industrial production data, the retail sales figures suggested today's third-quarter GDP figures were likely to be higher than the City expected.

The average forecast is for a 0.7% increase but some analysts warn that it could well be over 1%.

"The economy is still clearly growing above trend. I don't know where the mythical slowdown in consumer demand is in the data. I still think rates need to rise," said Richard Iley of ABN Amro in London.

"The longer the MPC prevaricates by emphasising backward-looking wage inflation data, the bigger the ultimate rise in rates will have to be," he said.

A breakdown of the data showed that food sales rose a solid 0.4% on the month, while non-food sales increased 0.7%.

Within non-food sales, textiles, clothing and footwear were the best performer, rising 1.2% on the month.

Daniel Kaye, of Capital Economics, said that whatever the constraints on consumers in the week of the fuel crisis this was more than offset by the volume of spending in subsequent weeks.

"This should provide ample opportunity for the hawks on the MPC to regroup next month, making the next vote a much closer call than the last one," he said.