While no doubt distorted, the shock 3.5% surge in retail sales in May shows that households are not yet adjusting to the stagnation in their living standards implied by higher food and energy prices, as Mervyn King has argued they must if inflation is to return to the 2% target. Even more worryingly, some consumers may be bringing forward spending in anticipation of future price rises, a possibility that will heighten MPC fears that inflation expectations have become dislodged from the target.

While the sales figures will capture the headlines, however, a further slowdown in money supply growth suggests longer-term inflationary risks are diminishing. M4 rose by 10.0% in the year to May, down from 11.0% in April and the lowest annual increase since February 2005. Corporate liquidity trends have been particularly weak recently (see here), implying worsening prospects for business spending – an offset to concerns about (temporary) consumer resilience.

The risk of a rate rise has increased but monetary trends suggest current policy settings are already sufficiently restrictive.