(OFFICIAL)-UK retail sales surge in August, likely to boost BoE rate hike bets

(Corrects paragraph 6 on likelihood of flat Q3 retail sales,

after ONS corrects estimate given to media)

By David Milliken

LONDON, Sept 21 (Reuters) - British retail sales

unexpectedly surged in August, official figures showed on

Wednesday, boosting the chance that the Bank of England will

raise interest rates in November.

Last week the BoE (Shenzhen: 000725.SZ - news) said it was likely to raise interest rates

in the coming months if the economy and inflation pressures

strengthen as expected.

Wednesday's official data showed a sharp pick-up in monthly

sales growth in August to its fastest since April, despite

inflation pressures that have previously squeezed spending.

Retail sales volumes rose 1.0 percent month-on-month,

beating all economists' forecasts in a Reuters poll, and July's

sales growth was revised up to 0.6 percent.

Looking at the three months to August as a whole, which

smooths out monthly volatility in the data, sales growth versus

the previous three months rose to 1.2 percent from a

three-monthly rate of 0.7 percent in July.

The ONS said sales would need to fall at least 2.9 percent

in September for there to be no third-quarter growth overall.

BoE policymakers expect moderate third-quarter retail sales

growth as consumer demand shows signs of improving after

weakness earlier in the year, though they said it was too soon

to tell if it would compensate for weak business investment.

Compared with a year earlier, sales in August were up 2.4

percent versus expectations of a 1.1 percent rise.

"Within this month's retail sales we are seeing strong price

increases.... However, we are still seeing underlying growth in

sales volumes, and with strong growth in non-essential

purchases," ONS statistician Kate Davies said.

Rising inflation has eaten into British consumers'

disposable income this year, causing the weakest first quarter

for retail sales since 2010, as the fall in the pound after last

year's Brexit vote pushed up the cost of the imports.

The measure of inflation used in retail sales data rose to

an annual rate of 3.2 percent in August, up from 2.7 percent.

Looking just at goods sold in non-food stores, inflation was its

highest since March 1992.

Official data last week showed that wages in the three

months to July were 0.4 percent lower in real terms than in

2016, and a survey of households by financial data company

Markit (NasdaqGS: MRKT - news) reported the biggest squeeze in three years in the three

months to September.

Private-sector figures had given a mixed message on retail

spending in August. The Confederation of British Industry

reported the weakest performance since July 2016, while the

British Retail Consortium said top-line growth was the fastest

so far this year.

The BoE expects inflation to peak at just over 3 percent in

October, compared with 2.9 percent now, and then fall slowly.

British fashion retail firm French Connection Group Plc

reported on Tuesday that it had seen momentum build in

recent months despite difficult trading conditions.

Larger rival Next (Frankfurt: 779551 - news) raised profit forecasts last week

and said it expected price rises of no more than 2 percent in

the first half of 2018 and none in the second half, if the pound

stays stable.

The ONS said non-food retailing and online drove retail

sales growth in August, at the expense of purchases of food.

Growth was partly driven by sales of watches and jewellery.

(Reporting by David Milliken and William Schomberg)