High street in a slump but luxury names buck trend

THE continued squeeze on household spending coupled with rising prices led to worse than expected high street sales figures last month and strengthened calls from business leaders for interest rate rises to be delayed.

The official retail sales figures for May were also in stark contrast to annual figures yesterday from luxury handbag retailer Mulberry where strong demand from well-heeled shoppers saw profits more than quadruple.

The Office for National Statistics (ONS) said supermarkets, electrical goods and DIY stores appeared to be bearing the brunt of the squeeze on household budgets.

Sales volumes in UK food stores slumped by more than 3 per cent in May compared with last year, although the value of sales rose by 1.7 per cent after retailers lifted prices by 5.3 per cent to offset inflationary pressures.

The drop in volumes of 1.4 per cent for the whole retail sector was also higher than commentators had expected.

The gloomy figures came after the Scottish Retail Consortium own statistics revealed the total value of retail sales in Scotland during May suffered their biggest drop since 1999.

Economists expressed alarm at the latest UK survey, although they pointed out the headline monthly drop was distorted by the previous month's boost from the weather and royal wedding.

Vicky Redwood, an analyst at Capital Economics, said the outlook for the rest of the year was poor.

She said: "We expect this trend to worsen as households respond to the intensifying squeeze on their real pay. We continue to think that overall household spending will drop by about one per cent this year."

Grocery giants Sainsbury's and Tesco both warned this week that higher petrol prices were having an impact on consumer spending, with Sainsbury's adding that its cheapest Basics brand was the fastest-growing at the store chain, signalling a move by customers to keep their costs down.

Richard Lim, an economist at the British Retail Consortium, said: "A return to sunny weather through the summer may provide another lift to retail sales, but it will take more than the holiday season to fix the underlying problem of low consumer confidence."

The British Chambers of Commerce (BCC) said the report was a clear sign that any move to raise interest rates would be a "mistake" given the pressures facing businesses and consumers and with the government's fiscal austerity programme continuing to bite.

BCC chief economist David Kern said: "More must be done to sustain growth and empower businesses to create jobs, export and invest. Productivity has fallen significantly since 2008 and recouping these losses must be a key policy priority."The latest figures from Mulberry confirmed that some luxury good retailers appear immune from the spending squeeze with pre-tax profits of 23.3 million in the year to 31 March, compared to 5.1m the previous year. As the group eyes further expansion in China and Japan, analysts believe it could more than double profits by 2014.