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LONDON (Reuters) - British retail sales rose much faster than forecast in February, suggesting that the economy's solid recovery extended into the first quarter of the year, official data showed on Thursday.
Sales volumes compared with January increased at three times the pace expected in a Reuters poll, pushing up the pound. On a less volatile measure, over the three months to February they rose at their strongest pace since August last year.
Consumers, many of them buoyed by a strengthening housing market, have been the driving force behind Britain's rapid economic recovery even as household income has been squeezed by slow wage growth and high inflation in recent years.
That strain on consumers could begin to ease off soon, with inflation now trending below the Bank of England's 2.0 percent target and wage growth beginning to pick up.
"The UK consumer is powering on, helped by improving pay growth, subsiding inflation and very low interest rates. Even the rain during February did not appear to dampen spirits on the high street," Rob Wood chief UK economist at Berenberg said.
The pound rose to $1.6627 after the retail sales data, from $1.6570 beforehand.
However, Alan Clarke, economist at Scotiabank, said it was hard to see how this pace of growth could be maintained. "After all, real income growth has only just turned positive," he said.
Retail sales volumes rose 1.7 percent on the month - bouncing back from a 2.0 percent fall in January - to show 3.7 percent growth on the year, the Office of National Statistics said. Economists had expected retail sales to edge up 0.5 percent on the month and to be 2.5 percent higher on the year.
Sales were 1.6 percent higher in the three months to the end of February compared with the previous three-month period, the ONS said. That was its highest since August last year.
The growth in retail volumes was led by food stores which contributed more than a half of the growth in retail sales.
The data suggested economic growth could hit 0.8 percent in the January-March period from the previous three months, picking up a bit of speed from the fourth quarter, said Simon Wells, HSBC's chief UK economist.
Policymakers have stressed that for the recovery to be sustainable it needs to be broadened out to include exports and investment. The head of clothing retailer Next said last week that Britain's recovery was being driven by an unsustainable pick-up in consumer borrowing.
Surging house prices in London meanwhile have raised the risk of a housing bubble and the BoE on Thursday prepared tools to rein in potentially dangerous lending.
Nonetheless, the central bank has said it is in no hurry to raise interest rates with inflation at 1.7 percent, its lowest since October 2009.
Thursday's data showed further signs of weaker prices. Average prices of retail goods sold fell 0.2 percent in February versus a year ago, its first fall since September 2009, pushed down by weaker fuel prices.
A survey on Thursday showed the public's inflation expectations over the next 12 months eased in March to their lowest in more than four years.
Another survey added to signs of recovering purchasing power. Pay awards in factories held at their highest level since mid-2012 in the three months to February.
Retail sales growth eased in March, according to a third survey this week, partly due to the later timing of Mother's Day and Easter this year but there were signs that sales would rebound next month.
Editing by Susan Fenton