Surprise bounce in retail sales

Britain's retail sales unexpectedly bounced back last month as shoppers apparently shrugged off the Bank of England's five interest rate rises since November. Economists had forecast a decline in sales in August after survey data suggested bad weather kept shoppers away from stores.

The better than expected retail figures meant further rises in the cost of borrowing by the Bank of England were likely, said economists.

The Office for National Statistics said sales rose by 0.6% in August, compared to a decline of 0.6% in the previous month, to stand 6.5% up on a year earlier.

In recent weeks, a slowdown in the retail sector and signs of a weakening of the housing market had led some analysts to believe that the cost of borrowing had reached its peak at 4.75%.

Analysts said the strength of retail sales meant the consumer slowdown was not yet a "done deal" and now expect the Bank of England to raise interest rates by a further 0.25% to 5% by the end of the year.

"[The figures] support our view that recent suggestions that interest rates have already peaked are too premature," said Paul Dales at Capital Economics.

Despite the better than expected data, city analysts warned that the consumer boom would slow over the rest of the year.

"Looking forward, we think that sales growth will slow sharply as higher interest rates start to pinch and consumer confidence fades away as the housing market slowdown gathers pace," added Mr Dales.

Clothing and footwear sales performed well with volumes up by 3.7%, the fastest rate since June 2003. Annual growth increased by 9.3%, thanks to prices being nearly 6% lower than last year.

A slower rise in clothing and footwear prices for August compared to last year helped to push down the overall consumer price index to 1.3%. Prices in August usually rise after the end of the summer sales.

The bounce-back in August clothing sales recorded by the official snapshot, contradicts recent survey data that suggests that exceptionally wet weather kept shoppers away, especially from clothing retailers.

Some analysts say that the cold, wet weather in August may have encouraged shoppers to bring forward their winter wardrobe purchases. "This is a zero-sum game though so clothing sales may suffer throughout the rest of the autumn," said Alan Castle, at Lehman Brothers.

Separately, US data showed consumer prices rising by only 0.1% on the month in August, confirming economists' feeling that inflation in the world's largest economy remains under control in spite of rising oil prices.

In the eurozone, the second-estimate inflation for August was confirmed at an annual 2.3%, above the European Central Bank's target of 2% but a decrease from the recent peak of 2.5% in May. Core inflation - excluding energy, food, alcohol and tobacco - rose to 1.9% from 1.8% in July.