Prices rise as shoppers keep on spending

Prices rise as shoppers keep on spending

Britain's consumers have carried on spending in the face of three increases in interest rates since the summer and allowed the nation's shops and stores to increase prices at their fastest rate in more than three years, the CBI said yesterday.

In its latest snapshot of the high street, the employers' organisation reported a third successive month of robust sales growth - countering fears that higher borrowing costs would prompt belt-tightening. The City said the CBI data, together with separate figures showing an improvement in business conditions for manufacturing, increased the chances of a spring increase in interest rates from the Bank of England.

Its monetary policy committee gathers for its monthly two-day meeting next week. Although the Bank has never moved rates ahead of the budget in its 10 years, a minority of City analysts believe the inflation threat will prompt a move this month. Most believe any increase will come in April or May. The CBI said it would not be surprised to see rates go up again, particularly if pay rises started to edge up in response to last year's rise in inflation.

John Longworth, executive director at Asda and chairman of the CBI's distributive trades panel said: "The headline figures show a heartening high street performance in February as year-on-year sales volumes grew again and selling prices continued to rise. The recent rally in pricing power, while good news for retailers, will provide food for thought.....continued below

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for interest rate watchers."

The CBI survey showed 43% of retailers reporting higher sales volumes than a year earlier while 24% saw a fall. The balance of +19 percentage points was lower than in December or January but contrasted with the -19 points in February 2006. The CBI said the underlying trend was the strongest since July 2004. Demand for household goods was especially strong in January following the strength of the housing market. The Bank yesterday reported mortgage approvals up to 120,000 after a fall to an eight-month low of 114,000 in December.

Evidence in the survey that retailers are increasing orders from suppliers was supported by the monthly look at industry from the Chartered Institute of Purchasing and Supply. Its purchasing managers index rose from 53.2 in January to 55.4 last month - its highest level since July 2004. A reading above 50 indicates that the manufacturing sector is expanding.

Analysts said that, as with the CBI survey, the Bank was certain to be concerned by signs of upward pressure on prices. Factory gate prices rose at their fastest rate last month since the survey began in 1999, the CIPS said.

Andrew McLaughlin, chief economist at RBS, which produces the data for the CIPS, said: "Prices-charged inflation hit a series high while cost inflation remains elevated. Such signs that inflationary pressure is still building in the manufacturing sector, coupled with strong manufacturing growth, should provide additional ammunition for the more hawkish members of the MPC."

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