Stingy shoppers point way on interest rates

First inflation falls to a record low of 1.9%, then earnings growth eases and now retail sales drop. Far from suggesting the need for a further interest rate increase, this week's batch of economic data points to the the next move in borrowing costs being down.

Given uncertainties about the labour market, where good news on the earnings front was offset by a sharp acceleration in the speed at which unemployment is falling, and lingering concern about the reliability of the soggy first quarter GDP figures, the first cut in in terests rates is still probably some way off. But even the hawks on the monetary policy committee can not fail to be impressed by the way upward price pressures remain under lock and key on the high street.

Yesterday's retail sales figures, showing a surprising 0.3% drop in volumes last month compared with March, were no doubt artificially depressed by the poor weather in April, the wettest month since 1776.

However, they also appear to reflect the reluctance of shoppers to pay higher prices. Michael Saunders, an economist at Schroder Salomon Smith Barney Citibank, points out that the retail prices rose 0.3% month-on-month whereas in the previous six months they had fallen by an average of 0.1% each month.

It seems that, despite the strength of economic growth, rising real, inflation-adjusted, incomes and the wealth-effect associated with rising house prices, consumers remain as cost-conscious as ever, continuing to play cat and mouse with retailers to ensure they get value for money. When prices rise, consumers go on a buyers' strike; when they fall, or are held steady, they open their wallets.

As well as helping to keep the lid on the rate of inflation, this bodes well for the future if sterling falls against the euro. The minutes of this month's monetary policy committee meeting, published on Wednesday, showed that some members live in fear of a weakening of the pound, arguing that it will unleash a wave of inflationary pressure which would have to be tackled by sharp rises in interest rates.

If consumers were spending recklessly, they could well be right. But the evidence from yesterday's figures suggests that shoppers continue to watch price tags closely.

BT better in bits


By the end of the financial year BT's gearing is expected to be around 100%. For a company which traditionally has a debt-to-equity ratio considerably nearer zero than the three figure mark BT's apparent insouciance in the face of such a figure appears remarkable.

The reality is that by the standards of the industry the figure is conservative. Telecoms is a business which gobbles cash at a rate to test the strongest nerves - look no further than the bidding for the third generation mobile phone licences.

BT is already involved in the bidding elsewhere - no doubt hoping that at least some governments will prefer beauty parades (based on business plans, investment and employment) to hefty upfront fees. But while money flows out readily enough, traditional cash cows such the British fixed line business are facing growing competitive pressure.

The question is whether BT has the resources to drive the business forward. The top management is confident it has. They could be right. The balance sheet can take plenty more strain yet, but it is worth noting that other formerly state-owned groups are developing alternative fire power. Deutsche Telekom, for example, floated its internet business T-Online with the express intention of using its shares as an acquisition currency. T-Mobil is being pencilled in for a stock market launch too. Telefonica has floated TPI and Terra Networks, which has just bought Lycos.

BT has been rather slower off the mark. Only Yell, the Yellow Pages subsidiary, is definitely being groomed for demerger, though other bits of the business may follow. So they should. BT is likely to need the resources thus generated as well as the boost such a pro gramme would give the share price. These days stock market ratings mean at least as much as credit ratings.

Fair enough


On the face of it, Stephen Byers's plans for the office of fair trading, look reasonable enough. The OFT will get new powers so there is a case for a new structure. Broadening the range of skills and expertise available by adding a board with at least five members should guard against future directors-general becoming over mighty or out of touch.

But, given the strained relations between the government and the outgoing director-general, John Bridgeman, it is worth pondering if this is not another example of the administration's fondness for giving institutions greater freedom of action and then seeking some way of checking that independence.