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INSTANT VIEW-Retail sales rise unexpectedly in July

LONDON (Reuters) - Retail sales rose unexpectedly in July even as prices rose at their sharpest rate in a decade, official data showed on Thursday.

The data call into question the extent of the consumer slowdown but the statistics office said there was evidence of shoppers switching to discount stores and cheaper products.

The rise in prices was driven by food.

ANALYST COMMENT

VICKY REDWOOD, CAPITAL ECONOMICS

“July’s robust rise in retail sales should be taken with a pinch of salt, given that the official sales data have been unusually volatile over the past few months.

“Abstracting from this volatility, sales appear to have been broadly flat since the start of this year. What’s more, we suspect that the official figures are still giving an overly upbeat picture.

“We know that the MPC is currently placing more weight on the anecdotal and survey evidence than the official sales figures.

“Nonetheless, there is clearly still a risk that consumer demand remains resilient enough for retailers to try to pass on more of their rises in costs to consumers, continuing the upward trend in core inflation. And as long as upside inflation risks remain, near-term rate cuts remain off the agenda.”

JAMES KNIGHTLEY, ING

“The worrying aspect from the BoE’s perspective is the pick-up in the price deflator. It was caused by higher food prices and leaves high street inflation running at its highest rate since May 1998.

“This, coupled with worries about further utility bill price hikes due to a Norwegian gas pipeline shutdown could keep inflation at the 5 percent level for longer than many had hoped and leads us to doubt the prospect of a November rate cut that several analysts has been expecting.

“Nonetheless, with the retail sector remaining vulnerable to rising unemployment, negative real wage growth, the credit crunch and falling asset values rate cuts will still happen. It is just that we believe 1Q09 is a more probable start time.”

GEOFFREY DICKS, RBS

“The July data were stronger than expected. Despite another jump in High Street inflation volumes rose nearly 1 percent in the month, which tells us that the cash spend was a healthy 5.2 percent year-on-year.

“The mix is as before with bigger ticket, housing related sales doing badly and smaller ticket items doing well (supported by tourist sales in central London). Despite an intensifying squeeze on household budgets, the UK consumer is down but by no means out.”

GEORGE BUCKLEY, DEUTSCHE BANK

“There’s a huge amount of variation in these figures and I wouldn’t put a huge weight on it.

“I think we are going to see further weakness in retail sales going forward. I am not sure it is going to be every month because they are volatile but you will see official retail sales match up with survey evidence.”

ALAN CLARKE, BNP PARIBAS

“It’s a random number generator at the best of times -- the Bank of England even conceded that in the Inflation Report. This number warrants caution in its interpretation. The trend is your friend and it is very much downward. We have to look through short term volatility.

“I think in assessing the strength of consumer spending we have to take everything into account and it all points to doom and gloom.”

KEY POINTS

- Weakest annual sales growth since Feb 2006

- Biggest annual fall in non-specialised store sales since

Jan 1995

- Biggest annual decline in household goods stores since

July 2005

- Highest retail sales deflator since May 1998 when it was also +1.6 pct

- The ONS said the rise in average prices was driven by food

stores. The food deflator stood at 6.1 percent, the highest

level since March 1992.

- The ONS said there was evidence of consumers moving to

discount food stores where sales had gone up and also switching

to discount lines of merchandise.

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