High street hit by rising costs, falling spending

Retailers have been unable to pass on their costs to shoppers who are already burdened with soaring mortgage and energy bills and alarmed by falling property values, said City economists.

The high street crunch raises the risk of a major chain going bust.

With many chains already on their mid-season sales, the dilemma was highlighted by unexpectedly weak inflation figures. Prices rose by just

2.5 per cent in the year to March, less than the City had been expecting and unchanged on February.

The cost of living in the capital is rising far more quickly than the rest of the country. Independent figures from the Centre for Economics and Business Research show a London inflation rate of 4.3 per cent.

Jonathan Loynes, chief European economist at Capital Economics, said: "For now at least, the slowdown in the high street appears to be forcing retailers to absorb the sharp increase in producers' costs and selling prices in their profit margins." George Buckley, chief UK economist at Deutsche Bank, said: "Retailers are trying to keep prices low because otherwise consumers won't be able to afford discretionary spending."

Today's inflation rate announcement follows "dreadful" figures from the British Retail Consortium, which showed retail sales down 1.6 per cent last month, the worst decline since July 2005. Its director general Stephen Robertson called it "the strongest evidence yet that customers are making serious economies". Department store chain Debenhams told the City today its sales fell one per cent last year and its profit margin was squeezed.

Chief executive Rob Templemansaid: "We expect the trading environment to remain challenging."

Tesco said it had been forced to absorb cost increases and had increased prices by only 1.2 per cent last year.

In a statement accompanying its 2007 results, it said: "Further rises in commodity food prices in the second half saw inflation rise to just over two per cent in our fourth quarter, with food price inflation being offset by continuing deflation in non-food categories."

The Office for National Statistics said the core inflation rate was being held down by the price of furniture, computer games and clothes, which all fell or rose only slightly. After stripping out volatile items such as food and energy, it was just 1.2 per cent - the lowest since August 2006.

Inflation may peak below three per cent and is expected to start falling in the second half of the year, giving scope for further interest rate cuts.