U.K. retail sales unexpectedly rose by the most since records began two decades ago as Britons bought more seasonal food and clothing during the warmest May ever. Sales rose 3.5 percent, the most since the series started in 1986, after falling 0.3 percent in April, the Office for National Statistics said today in London.

Economists forecast a 0.1 percent drop, the median of 37 estimates in a Bloomberg survey shows. Sales rose 8.1 percent on the year, the most since 2002.

The reading suggests rising food and energy costs and falling house prices have yet to provoke a slowdown in consumer spending. Governor Mervyn King said yesterday that policy makers won't flinch in their fight against accelerating inflation, which will require British living standards to slip and economic growth to weaken.

``This is off the scale,'' said Michael Taylor, an economist at Lombard Street Research Ltd. in London. ``This number shows more resilience in the U.K. consumer than we had thought, but the underlying picture remains one of weakness. My view is that interest rates are on hold for the rest of this year, and then cuts next year.''

The pound rose as much as 0.4 percent against the dollar after the report, trading at $1.9710 as of 9:36 a.m. in London. Against the euro, the U.K. currency rose as much as 0.5 percent, trading at 78.75 pence.

Consumers bought more fresh food and summer fashions in May, when the temperature averaged 12.1 degrees Celsius, the most recorded by the government's meteorological service. Sales of textiles, clothing and footwear rose 9.2 percent on the month, the most since at least 1986.

Burberry Sales

Burberry Group Plc, the 152-year-old British luxury label known for its trademark plaid, said May 28 that its second half profit rose 15 percent after shoppers bought $2,195 Warrior bags.

The U.K. inflation rate rose to more than a percentage point above the 2 percent target in May, forcing King to write a letter of explanation to Chancellor of the Exchequer Alistair Darling. King said that while the rate may stay ``markedly'' above the target next year, ``the path of bank rate that will be necessary to meet the 2 percent target is uncertain.''

Crude oil prices surged to a record above $139 a barrel on June 16, and corn climbed to a record near $8 a bushel. Energywatch, a consumer research group, says gas prices for U.K. households have more than doubled since 2003.

Inflation Pressures

Some retailers are already reporting faster price gains are pinching purchases. J Sainsbury Plc, the country's third-biggest supermarket chain, said yesterday first-quarter sales growth slowed as higher food and energy bills cut spending on food and clothes. Chief Executive Justin King said ``inflationary pressures'' will persist for another six months to a year.

King and Chief Economist Charles Bean said on May 14 that they are looking more closely at surveys of retailers by the British Retail Consortium and the Confederation of British Industry to gauge consumer spending. They have shown more weakening than the official data.

The statistics office said in a note published today that differences between them are accounted for by growth in small and medium-sized businesses, which are included within the government data and are excluded from the BRC survey.

Policy makers defeated David Blanchflower's call for a rate cut this month, keeping the benchmark at 5 percent to guard against faster inflation. Minutes of the decision, published yesterday, showed slower growth ``would be necessary to endure inflation returned to the 2 percent target.''

Price Deflator

The slowdown may still erode inflation pressures. The price deflator, a measure of cost changes in shops, showed a 0.3 percent annual drop last month, the statistics office said. That was the smallest decline since June 2007.

The CBI, the nation's biggest business lobby, this week predicted that the U.K. economy will grow 1.3 percent next year, the least since 1992.

House prices stayed close to their weakest since 1978 as the credit squeeze prompted banks to approve fewer mortgages and raise rates for home loans, the Royal Institution of Chartered Surveyors said June 10.

King told bankers in London late yesterday that the central bank is ready to take action to get inflation under control, even if that means an economic slowdown is necessary.

Bloomberg