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Last Updated: Thursday, 20 July 2006, 09:37 GMT 10:37 UK
World Cup boosts UK retail sales
Sale sign in a shop window
Demand during the World Cup meant retailers could stop price cuts
UK retail sales have posted strong growth in June, driven by sales of food and drink during the football World Cup, official figures have shown.

Sales grew 2.1% in three months to June from the same period a year earlier, the Office for National Statistics said. Sales increased 0.9% from May.

The figures come as analysts worry about the direction of UK interest rates and the pace of inflation.

Earlier this month, the Bank of England left its key rate unchanged at 4.5%.

Government target

"The strength of retail sales in June is far in excess of market expectations," said Philip Shaw, an economist at Investec. "This will keep upward pressure on interest rates."

The Bank has left its interest rates unchanged for 11 months, despite increasing evidence that consumer price growth has accelerated.

Earlier this week, the ONS said that consumer prices were 2.5% higher in June, well above the government's 2% target.

The headline rate of RPI inflation, which includes mortgage interest payments, rose from 3% to 3.3%.

'Ongoing doubts'

The big question now is how the Bank of England's rate-setting committee will view the latest figures and whether it will force or stay their hand.

Italian players celebrate winning the football World Cup
Having brought forward spending for the World Cup, we are likely to see consumers make a compensating cutback later in the year
Jonathan Said, CEBR

Many analysts said that while the retail sales numbers were very strong, they probably were a blip that had more to do with the World Cup than a resurgence of the spending urge among consumers.

Howard Archer, an economist at Global Insight, said that he expected consumer spending to weaken in coming months.

"Consumers face a number of major headwinds, most notably soaring utility bills, moderate earnings growth and an increasing tax burden," he explained.

"Indeed, ongoing doubts about the future strength of consumer spending may well be a significant factor deterring the Bank of England from raising interest rates in the very near term at least," Mr Archer added.

Bottom line boost

One positive outcome from the surge in June retail sales may be an improvement in the earnings of retailers, many of whom have been having a difficult time in recent months.

"This indicates that retailers have recently had to rely less on discounting to get consumers to spend, and that some may have been able to pass on modest price hikes," Global Insight's Mr Archer said.

However, many observers warned that it was too early to break out the champagne and celebrate a retail boom.

"The positive news does not extend across all the sectors," said Jonathan Said of the Centre for Economics and Business Research.

"UK consumers remain cautious on how much they are willing to spend, and having brought forward spending for the World Cup, we are likely to see a compensating cutback later in the year," he added.

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