UK's retail sales plunge

British retail sales fell more than twice as fast as expected in May as worries about jobs and wages led consumers to cut spending back sharply. The biggest drop in sales volumes since January 2010 reinforced the case for the Bank of England to hold interest rates at record lows despite high inflation while also fuelling the debate over the government's tough austerity programme.
The Office for National Statistics said sales including automotive fuel fell 1.4 percent last month, after April's Royal Wedding helped drive a 1.1 percent gain a month earlier. The slump dwarfed analysts' forecasts for a fall of 0.6 percent. Data the previous day had shown inflation holding at a 2-1/2 year high of 4.5 percent in May as food prices rose. Inflation has been above the BoE's 2 percent target for 1-1/2 years.
BoE governor Mervyn King and Chancellor George Osborne spoke later on Wednesday of Britain's rough road to recovery, but also highlighted the need to stick with the policy mix of low interest rates and deep cuts in government spending. While the government has the backing of international organisations for its plan to eliminate Britain's record budget deficit, some economists and the main opposition party have been calling for a softer approach to support the struggling economy.
The UK economy is struggling to find momentum after a shock contraction late last year, and worries about a renewed slowdown have been growing. Data from the car lobby group SMMT showed that car production dropped 4.9 percent in May. The weak retail figures sent the pound down half a cent against the dollar and interest rate futures rose as investors bet that the Bank of England would leave interest rates at their record low 0.5 percent for some time to come. Money markets now only fully price in a first quarter-point hike in June 2012. At the start of this year, investors had been expecting a hike in May 2011.
Thursday's data showed that, excluding fuel, retail sales were 1.6 percent lower on the month. The overall fall was driven by the biggest monthly decline since June 2008 in stores whose main business is selling food. The ONS said retailers blamed the downturn on consumers cutting back because of factors including an increase in fuel prices and uncertainty over job prospects and pay.