The official retail sales data are still holding up fairly well. But we still think that the weaker anecdotal evidence is giving a truer picture of conditions on the high street. What’s more, the deterioration in the inflation outlook has made us even gloomier about the outlook for consumer spending. Not only will rising inflation squeeze households’ real incomes, but it will prevent interest rates from falling as quickly as previously looked likely. We now expect only two further cuts in rates by the end of this year, taking them to 4.5%. We still expect rates to fall sharply in 2009, but these cuts will not boost spending straight away. We now expect real consumer spending to rise by just 0.5% next year (compared to our previous forecast of 1.0%), following a rise of about 1.5% this year.
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