A second month of heavy discounting led to stronger-than-expected growth in retail sales during August, new figures showed yesterday.
The figures from the Office for National Statistics revealed that sales rose by 0.6 per cent during the month, compared with forecasts of around 0.2 per cent, driven by a rebound for food stores.
The sales increase will be seen as an indication that consumer spending is holding up despite the tougher economic conditions, reinforcing predictions that the Bank of England will be unlikely to follow the recent US move with a forthcoming rate cut.
However, the continued strong discounting by retailers indicates they are less confident over consumer spending, as they slash prices to draw in shoppers.
Economists expect consumer spending to continue to wane over the coming months as higher interest rates, muted disposable income growth and higher debt levels filter through to consumers' pockets.
In addition, the recent crisis at Northern Rock could well exacerbate worries about the economic outlook, hitting consumer confidence further.
Global Insight chief UK economist Howard Archer said: "The Bank of England will closely monitor how the credit crunch and Northern Rock crisis is impacting the real economy and affecting the outlook for growth and inflation.
"If it becomes increasingly clear that growth is being significantly hit, thereby diluting underlying inflationary pressures, the Bank of England will become more inclined to trim interest rates before the end of the year."
Accountants Ernst & Young said the figures marked the end of "a difficult summer for most of the retail sector and underlines the continued tough trading conditions on the high street".
And the firm cautioned: "More importantly though, September has brought a further deterioration in consumer sentiment.
"The psychological impact of the Northern Rock crisis is likely to put a further brake on many shoppers' spending. It also seems likely that the full effect of the five interest rate rises is only now working its way through to the consumer's pocket. And the reported slowdown and uncertainty in the housing market clearly adds to this consumer fragility."
E&Y said a "helping hand" from the BoE Monetary Policy Committee - an interest rate cut - would be a boost for the retail sector as it prepares for the crucial run-in to Christmas. So far there is little sign of that happening.
And it went on: "Even so, most retailers will need more than a quarter point cut in interest rates in order to enjoy a decent festive period - an unwavering focus on customer service, product availability across all channels and a strategic approach to pricing will be key, not to mention a prolonged stint of cold weather."
During the month, food and drink sales increased by 1.3 per cent - the highest rise for more than a year - as supermarkets continued to slash prices to win custom.
The figures tie in with recent data from market research group TNS, which revealed grocery sales grew by four per cent in the 12 weeks to September 9, while supermarket Morrisons said like-for-like sales rose by three per cent in the seven weeks since the end of July.
This represented an improvement from 2.7 per cent in the first half of the year after a slowdown during the summer months.
Household goods sales, including furniture and DIY, as well as non-specialised shops, such as department stores, fell.
Annual sales grew 4.9 per cent, up from 4.4 per cent in July.
