Windfalls are being spent on TVs and washing machines

Windfalls Drive High Street Boom

This was almost 1% higher than the figure for June. The upward movement in sales is likely to increase pressure on the Bank of England to put up interest rates.

The Office for National Statistics said the index was being driven by sales of household goods, which included the impact of the building society conversion windfalls.

Statistical Revision

But the Office also said part of the rise was the result of a downward revision of the figure for July 1996, without which the headline figure would have read 6.1%. However, even this figure was above forecasts.

The Paymaster General, Geoffery Robinson, said the Government had expected the windfall payments to have a major effect on the figures in the summer months. "They're entirely expected and we budgeted for this," he told BBC Radio.

But the figures may still reawaken fears that the Bank of England will raise interest rates, despite saying two weeks ago that it wanted to take a "pause" on rate movements in the short term.

Geoffery Robinson

"We budgeted for this"

The City took the figures in its stride, as share prices, which already made gains were largely unaffected by the figures. In the three months to July -- the timespan the ONS prefers, as it gives a clearer picture -- sales were 5.8% up on the same period a year ago, an increase from the 5.3% recorded last month and the highest level since the boom days of September 1989.

Boom-bust Cycle

The surge was again driven by the household goods sector, where sales soared by 15.8% year-on-year, indicating that more of the £35 billion from conversion windfalls were flooding onto the high street.

The household goods figure hit new highs not seen since the late 1980s, stoking fears that the economy is heading for a repeat of the boom-bust cycle of the Lawson era.

The Liberal Democrats' Treasury spokesman, Malcolm Bruce, said: "This big rise in retail sales demonstrates that the economy is still seriously unbalanced between a strong consumer boom and a depressed exporting and manufacturing sector."

"As Gordon Brown failed to deal with the consumer boom in his recent Budget, it is clear that the pressure is still on for higher interest rates," he said.