SCOTTISH Chambers of Commerce has warned of a “real threat” to the economy from falling consumer spending power and called for a cut in value-added tax, after it emerged annual UK inflation had hit 2.9 per cent.

Meanwhile, in its latest monthly survey published today, the Scottish Retail Consortium (SRC) cautions that family finances are “set to be buffeted further by overall inflation outstripping the growth in wages”. The SRC survey shows the value of Scottish retail sales in May was down 0.2 per cent on the same month of last year. Non-food retail sales remained weak.

A jump in the cost of overseas package holidays, against a backdrop of sterling weakness caused by the Brexit vote, was among the main drivers of the rise in annual UK consumer prices index inflation from 2.7 per cent in April to 2.9 per cent in May.

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Economists had projected unchanged annual CPI inflation of 2.7 per cent in May, so the Office for National Statistics’ figures were significantly worse than expected.

The ONS also cited a rise in the prices of computer games and equipment.

In spite of the surge in inflation, economists voiced a belief that the Bank of England’s Monetary Policy Committee would be reluctant to raise UK base rates from their record low of 0.25 per cent. The MPC’s target for annual CPI inflation, set by the Treasury, is two per cent. Annual CPI inflation has surged from 0.3 per cent in May 2016, the month before the Brexit vote.

ONS figures last month showed households in Great Britain had suffered the first annual fall in real earnings for two-and-a-half years, amid the inflation surge caused by sterling’s post-Brexit vote weakness.

Scottish Chambers of Commerce declared yesterday: “The news that inflation has risen to 2.9 per cent has reinforced the case for a temporary reduction in VAT.”

A Visa survey on Monday showed the first year-on-year fall in UK consumer spending since September 2013. Spending in May was down 0.8 per cent on a year earlier.

Liz Cameron, chief executive of Scottish Chambers, said: “This week we have learned that household spending has fallen for the first time in four years, which comes as no surprise given continued high inflation, which has been outpacing increases in earnings. This is an early warning sign that there is a real threat to our economy from a decline in consumer spending power.”

She added: “Although the political situation at Westminster has not yet fully settled down following last week’s General Election, the continued elevated rate of inflation above the Government target of two per cent calls for urgent action to address the impact this is having on businesses and consumers.”

In late 2008, in the depths of the financial crisis and consequent recession, former Labour Chancellor Alistair Darling cut VAT from 17.5 per cent to 15 per cent temporarily to boost the economy.

After the Conservatives came to power, VAT was raised to 20 per cent.

Ms Cameron said: “At the time of the financial crisis and recession in 2008/09, the UK Government reduced VAT on a temporary basis in order to bolster consumer demand, and it is time that such a move was considered again to give people the confidence to spend and to reduce the pressures on business margins.

“Everything possible must be done to maintain consumer confidence in these uncertain times to provide a route to business growth and economic prosperity.”

The SRC noted the year-on-year movement last month in retail sales value in Scotland was the closest to that in the UK as a whole since August 2013. UK retail sales value in May was up 0.2 per cent on a year earlier. The year-on-year movement in retail sales value in Scotland has in recent years been significantly worse than that in the UK as a whole, reflecting partly greater economic and housing market strength in London and south-east England

Non-food sales value in Scotland last month was down 3.8 per cent on a year earlier. Food sales value showed a 4.5 per cent year-on-year rise.