Retail joy tempered by fears of VAT hike

Analysts expressed surprise yesterday at the findings of the latest distributive trades survey from the CBI, which polled more than 130 businesses who operate 20,000 stores between them.

Its monthly snapshot of high street activity revealed a sales balance of +35 for August, up from +33 in July and considerably higher than economists' forecasts of +20. This month's reading is the highest since April 2007.

A number of major retail shares reacted positively to the data, with Next, Burberry and Marks & Spencer each gaining about 2 per cent.

The CBI said retail sales volumes had been boosted by seasonal discounting and warm weather. Clothing sales growth was the strongest since the survey series began in 1988.

Last week, figures from the Office for National Statistics showed retail sales volumes had risen 1.3 per cent in July, compared to a year earlier, driven by strong demand for non-food goods.

Yesterday's unexpectedly strong CBI survey suggests that surge in the official sales measure was not just a flash in the pan and the economic recovery seen in the second quarter is continuing into the third.

However, it should be countered by recent data from the British Retail Consortium, which flagged the weakest sales growth since early spring, at just 0.5 per cent during July.

Reacting to the CBI report, Investec economist Philip Shaw said domestic demand appeared to be "holding up better than the bears are saying".

"The behaviour of consumer spending over the past two months is offering some grounds for hope," he added.

Retailers expect the robust performance to continue, as the expected sales balance for September only slipped slightly to +39 from the six-year high of +45 recorded in the previous month's survey.

The CBI's head of economic analysis, Lai Wah Co, urged caution, saying it was unclear how long the high street expansion would continue.

She said: "The broader outlook for consumer spending is still uncertain, given the VAT rise next year, subdued pay awards and the feed-through of public spending cuts to job losses."

The business group, which conducted its survey between 27 July and 11 August, said the number of people employed in the sector was broadly unchanged in the year to August, the first time it has not fallen on a quarterly basis since February 2004.

But there was a further warning on inflationary pressures as retailers reported the fastest pace of price increases since February 1992.Two-thirds of firms said average selling prices were up on a year ago, while just 9 per cent said they fell.

Bank of England policymakers are likely to be concerned about the inflation implications of retailers' pricing plans.

At 3.1 per cent, consumer price inflation is well above the central bank's target of 2 per cent and is expected to remain uncomfortably high for another year.

Most analysts expect high street spending to take a hit following January's planned VAT hike to 20 per cent.