Consumer spending powered British economic growth to its fastest rate in two years in the second quarter, keeping alive expectations interest rates will rise again in the coming months.
The figures provide further evidence some the UK economy is growing strongly and mean finance minister Gordon Brown is almost certain to beat his budget forecast for growth of between 2.0 and 2.5 percent for the full year.
The Office for National Statistics said on Friday Britain's economy grew 0.8 percent on the quarter and 2.6 percent on the year in the three months to June - unrevised from an initial estimate last month.
The Bank of England cited faster growth and rising inflation when it raised interest rates earlier this month for the first time in two years. Friday's data, which contained more detail than the initial estimate, confirmed the existence of both. Growth accelerated at its fastest rate since 2004 and the implied deflator - a key measure of price pressures - rose at its quickest in 15 years.
"The news today was in the detail and that detail was strong, painting a picture of an acceleration in demand and rising inflation," said John Butler, economist at HSBC.
UK interest rate futures, already pricing in a quarter-point hike to 5.0 percent before the end of the year, showed little reaction to the data. Strength in the second quarter was noted particularly in the services sector, with spending by households, businesses and the government rising sharply.
Consumer spending jumped by one percent on the quarter as the World Cup soccer tournament boosted demand for flat screen TVs and food and drink. But analysts doubted this rate of growth could be sustained.
ING economist James Knightley said he would not be surprised to see year-on-year growth pushing up to 3.0 percent in the third quarter. "However, the outlook thereafter is less positive with rising borrowing costs, utility bills and unemployment set to lead to weaker consumer activity," he said.
Evidence of rising price pressures was no great surprise. A YouGov/Citigroup survey this week showed a sharp rise in inflation expectations and the official measure of inflation remains well above target at 2.4 percent.
Output from the production industries actually fell in the April-June period. That weakness came mainly from electricity, gas and output water output which fell 3.0 percent - the sharpest quarterly decline in more than a decade. Unusually warm weather had reduced demand for gas and electricity while a hosepipe ban cut water usage.
Britain's economy is not the only one accelerating. Germany grew at its fastest pace in over five years in the second quarter, while the eurozone as a whole registered growth of 0.9 percent over the period - its fastest rate in six years. Britain's central bank has already revised its UK growth forecasts higher and is expecting the economy to expand by 2.8 percent for the year.
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