Booming economy sends consumer confidence soaring

Consumer confidence has jumped this month to its highest level since the summer of 1988, in the economy's latest echo of the Lawson boom.

The improvement in optimism follows figures earlier this week showing that the increase in the volume of sales on the high street this summer was the biggest since the late 1980s and that mortgage lending increased again last month.

The evidence that consumers are feeling good is now overwhelming. This will come as a great relief to the Government, which has been counting on an improvement in the state of the economy ahead of the general election.

However, the signs of a good, old-fashioned consumer boom are likely to prevent Kenneth Clarke, Chancellor of the Exchequer, from delivering a final reduction in interest rates ahead of the election. Indeed, many City analysts - along with the Bank of England - think the cost of borrowing might have to rise during the next few months to choke off inflationary pressure. Although headline inflation is likely to fall towards the Government's 2.5 per cent target for some months, the pick-up in demand will drive it up in the longer term.

Eddie George, Governor of the Bank of England, is likely to repeat his earlier advice, that he would prefer interest rates to be at 6 per cent rather than the current level of 5.75 per cent, when he meets the Chancellor at their regular meeting on Monday.

The financial futures market is betting that base rates will rise by a quarter-point before the end of this year.

According to yesterday's confidence survey, carried out each month for the EU Commission by GfK, the improvement in optimism was due mainly to greater confidence about general economic prospects. The number of respondents saying the UK's economic situation had got worse during the past 12 months or was likely to get worse during the next 12 declined substantially between August and September.

There were also modest improvements in people's optimism about their household finances, past and future. The overall confidence index rose from a balance of minus 3 per cent of optimists over pessimists in August to minus 1 per cent in September. For men, normally more optimistic, the index climbed from zero to plus 2 per cent. The consumer confidence index has only ever been positive for two or three months, with the exception of the boom years of 1987-88. John O'Sullivan, an economist at NatWest markets, said: "Today's survey confirms the strength of consumer sentiment and shows that households are now feeling the benefit of economic recovery."

The Government must now be hoping that the link between consumer confidence and the Conservatives' opinion poll showing can be restored. It broke down four years ago, when the pound dropped out of the European exchange rate mechanism.

There was anecdotal evidence yesterday that the consumer upswing has continued into this month.

The latest weekly sales figures from the John Lewis department store and supermarket group showed that sales in the seven weeks to 14 September were nearly 17 per cent higher than a year earlier.