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    Pound surges on robust UK retail sales growth in September

    UK consumers splashed out in September as the Rugby World Cup boosted spending during the month. Retail sales jumped by 1.9% on the month to give a year-on-year rise of 6.5% – the highest rate since November 2014. Consensus estimates were for retail sales to increase by 0.3% month-on-month and 4.8% annually. However, there was a downward revision to August’s figure, which was revised lower from 0.2% to -0.4% month-on-month. Excluding fuel, retail sales were up 5.9% year-on-year.

    The biggest monthly increases in sales came from household goods, non-store retailing and fuel stores. But sales of clothing and footwear were a drag as they fell by 0.9% month-on-month. Food sales were up 2.3% over the month as in-store promotions relating to the Rugby World Cup boosted sales. Average store prices continued to fall, decreasing by 3.6% in September from a year ago and making it the 15th straight month of annual drop in prices.

    According to the UK Office for National Statistics, the monthly surge in retail sales is likely to boost third quarter GDP by 0.1%. Though sales are likely to fall back in October once the effects of the Rugby World Cup subsides. The UK economy expanded by 0.7% quarter-on-quarter in the second quarter but is expected to slow in the third quarter due to faltering growth in emerging markets. Retail sales account for 5.7% of UK GDP and strong growth since 2014 has helped offset weak exports.

    Record low inflation and rising earnings have in recent months boosted the spending power of British households. The Bank of England is keeping a close eye on the pace of increase in average earnings but has so far not had to worry about rising store prices as falling fuel prices, lower import costs and intense competition between retailers has kept a lid on retail prices. But with last year’s big fall in energy prices expected to drop out of CPI calculations by the end of the year and unemployment continuing to fall, inflationary pressures could start building up soon.

    Like the US Federal Reserve, the Bank of England is keen to stay ahead of the curve by starting to raise interest rates before there is any significant increase in inflationary pressures so that when rates do start to go up, the tightening cycle can be shallower.

    The pound rose sharply against major currencies after the stronger-than-expected data. It jumped from around 1.5470 to 1.5507 against the dollar, having started to head upwards earlier on in European session. But it later fell back to the same level before the data. The euro hit a 1-month low of 0.7295 pounds before recovering to 0.7315 pounds.

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