Retail sales in UK post record jump

Retail sales unexpectedly soared last month at their fastest pace in at least two decades as Britons splashed out on summer clothes and food, raising expectations interest rates will go up soon.

Record sales of food and clothing, probably boosted by the sunny weather, pushed retail volumes up a mind-blowing 3.5 per cent on the month, official figures showed. That was the fastest pace since the series began in 1986. Analysts had expected a 0.1 per cent decline.

"I'm staggered," said Philip Shaw, chief economist at Investec. "The figures are on a completely different plane compared to what markets were expecting."

Markets reacted swiftly to price in interest rate rises in the next few months with the pound jumping nearly a full cent against the dollar. Many analysts have been expecting the Bank to cut rates later this year to shore up a slowing economy.

Official sales figures have been surprisingly resilient this year, often deviating from anecdotal and survey evidence. Retailers such as supermarket chain Sainsbury's and general store Woolworths have complained of challenging conditions.

Analysts said the surprising strength raised questions about the data's accuracy and whether it was reflecting a true picture of consumer demand.

"A big surprise," said Mark Miller, economist at HBOS. "It may very well be a weather-related issue for this particular month, but it's very difficult to see a strong trend in retail sales persisting throughout the year."

Bank of England Governor Mervyn King said late on Wednesday the economy was already slowing sharply, as it would have to in order to tame rising inflationary pressures. Evidence that demand remains robust could push policymakers into early interest rises to bring the inflation rate down to the central bank's two per cent target.

The ONS said the sales were driven by food and clothing. Food sales rose 3.3 per cent on the month and textile, clothing and footwear sales leapt 9.2 per cent in May - both the highest since the series began 22 years ago.

Separately, the ONS said public sector borrowing rose more than expected last month.

The public sector net cash requirement was £10.987 billion last month, above expectations for a reading of £6.5 billion and the highest for a May since the series began in 1984.

The public sector net borrowing was 10.955 - the highest for a May since that series began in 1993 and the second highest figure for any month.