September 21, 2017 / 10:39 AM / a year ago

CORRECTED-(OFFICIAL)-UK retail sales surge in August, likely to boost BoE rate hike bets

 (Corrects paragraph 6 on likelihood of flat Q3 retail sales,
after ONS corrects estimate given to media)
    By David Milliken
    LONDON, Sept 21 (Reuters) - British retail sales
unexpectedly surged in August, official figures showed on
Wednesday, boosting the chance that the Bank of England will
raise interest rates in November.
    Last week the BoE said it was likely to raise interest rates
in the coming months if the economy and inflation pressures
strengthen as expected. 
    Wednesday's official data showed a sharp pick-up in monthly
sales growth in August to its fastest since April, despite
inflation pressures that have previously squeezed spending. 
    Retail sales volumes rose 1.0 percent month-on-month,
beating all economists' forecasts in a Reuters poll, and July's
sales growth was revised up to 0.6 percent.
    Looking at the three months to August as a whole, which
smooths out monthly volatility in the data, sales growth versus
the previous three months rose to 1.2 percent from a
three-monthly rate of 0.7 percent in July.
    The ONS said sales would need to fall at least 2.9 percent
in September for there to be no third-quarter growth overall.
    BoE policymakers expect moderate third-quarter retail sales
growth as consumer demand shows signs of improving after
weakness earlier in the year, though they said it was too soon
to tell if it would compensate for weak business investment.
    Compared with a year earlier, sales in August were up 2.4
percent versus expectations of a 1.1 percent rise.
    "Within this month's retail sales we are seeing strong price
increases.... However, we are still seeing underlying growth in
sales volumes, and with strong growth in non-essential
purchases," ONS statistician Kate Davies said.
    Rising inflation has eaten into British consumers'
disposable income this year, causing the weakest first quarter
for retail sales since 2010, as the fall in the pound after last
year's Brexit vote pushed up the cost of the imports.
    The measure of inflation used in retail sales data rose to
an annual rate of 3.2 percent in August, up from 2.7 percent.
Looking just at goods sold in non-food stores, inflation was its
 highest since March 1992.
    Official data last week showed that wages in the three
months to July were 0.4 percent lower in real terms than in
2016, and a survey of households by financial data company
Markit reported the biggest squeeze in three years in the three
months to September.                          
    Private-sector figures had given a mixed message on retail
spending in August. The Confederation of British Industry
reported the weakest performance since July 2016, while the
British Retail Consortium said top-line growth was the fastest
so far this year.                            
    The BoE expects inflation to peak at just over 3 percent in
October, compared with 2.9 percent now, and then fall slowly.
    British fashion retail firm French Connection Group Plc
         reported on Tuesday that it had seen momentum build in
recent months despite difficult trading conditions.             
    Larger rival Next         raised profit forecasts last week
and said it expected price rises of no more than 2 percent in
the first half of 2018 and none in the second half, if the pound
stays stable.             
    The ONS said non-food retailing and online drove retail
sales growth in August, at the expense of purchases of food.
Growth was partly driven by sales of watches and jewellery.

 (Reporting by David Milliken and William Schomberg)
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