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U.K. retail sales fell for a second month in April as slumping house prices, faster inflation and the dearth of credit discouraged spending.

Sales declined 0.2 percent from March, when they dropped by the same amount, the Office for National Statistics said today in London. Economists forecast a 0.5 percent drop, the median of 30 estimates in a Bloomberg News survey showed. Sales increased 4.2 percent from a year earlier.

Bank of England Governor Mervyn King said last week that the U.K. may slip into recession as consumer spending, the driver of the fastest expansion in three years in 2007, cools. Confidence among shoppers fell to the lowest since 1992 last month amid record oil costs and falling house prices.

“Consumer spending certainly seems to be slowing quite a lot,'' said Nick Bate, an economist at Merrill Lynch & Co. in London who formerly worked at the U.K. Treasury. “Higher inflation is eating incomes, and credit conditions are tighter.''

The pound rose as much as 0.6 percent against the dollar after the report, which showed sales falling less than half as much as economists forecast. The currency traded at $1.9764 as of 10:16 a.m. in London.

Sales of food fell 1 percent last month, leading the overall decline. Household goods stores sold 1.4 percent less than the previous month and clothing sales were flat, the statistics office said. Retailers cut prices by 0.9 percent from a year earlier to attract shoppers, the report showed.

Marks & Spencer Group Plc, the U.K.'s biggest clothing seller, on May 20 reported slowing profit growth, cut staff bonuses and predicted “difficult'' conditions.

BOE View

Revenue at shops open at least a year fell from a year earlier for a second month in April, dropping 1.5 percent, the British Retail Consortium said May 13.

“We put quite a bit of weight on the surveys because they're consistent with all the other information that we're getting,'' King told reporters last week when he presented the bank's quarterly forecasts. “There is a noticeable slowing in consumer spending which didn't show up in some of the retail sales figures.''

Today's report showed some resilience in spending. Sales in the “other stores'' category rose 5.3 percent in the quarter through April, the most since the series began in 1986. Survey respondents said that shoppers bought more video games, including Grand Theft Auto IV and Wii Fit, the statistics office said.

`Negative Growth'

Policy makers forecast economic growth will slow to an annual rate of around 1 percent later this year after 3 percent growth in 2007. King said on May 14 that it's “quite possible we will get an odd quarter or two of negative growth.''

The rate-setting panel voted to keep the main interest rate unchanged at 5 percent on May 8 after three cuts since December.

“Further reduction in bank rate this month could create the impression that the committee was trying to stabilize output growth rather than maintaining its focus on the inflation target,'' minutes of the meeting showed yesterday.

`We think there will be a cut in November but if oil prices continue to gallop that puts that forecast into doubt,'' Amit Kara, an economist at UBS AG in London who formerly worked at the central bank, said in an interview on Bloomberg Television. The bank is determined that inflation needs to be under control in the medium term.''

The price of oil, which has more than doubled in the past year, rose above $135 a barrel for the first time today. Centrica Plc, Britain's biggest energy supplier, said this month it may raise household natural gas and power prices for the second time this year, leaving households with less money to spend.

Mortgage Costs

Homeowners are also paying more for their mortgages. U.K. banks increased the cost of home loans with a 5 percent down payment to the highest in more than eight years in April, failing to pass on the Bank of England's interest-rate cuts.

Property values fell from a year earlier for the first time in more than a decade, HBOS Plc, the country's biggest mortgage lender, said this month. A gauge of consumer sentiment declined 5 points from March to minus 24, GfK NOP Ltd. said on April 30.

“We are in a tougher market now,'' M&S Chief Executive Officer Stuart Rose said this week. Trading conditions may remain difficult through autumn 2009, he said.

Business investment fell 1.4 percent in the first quarter from the previous three months, the statistics office said in a separate report today. On the year, it rose 3.7 percent.

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