Today's retail sales figures, on first glance, are extraordinary.

The 0.6 per cent rise in retail volumes in September was stronger than predicted by every single City analyst. Over the past three months, sales are up by 1.7 per cent, the strongest rate since July last year when the Bank of England decided to start raising interest rates.

It is not easy to explain this increase when you consider that consumer confidence is down.

Adding to that, separate figures out today from the Council of Mortgage Lenders show a 12 per cent monthly drop in gross lending, hardly a sign that people are feeling confident about the economy.

But a big part of the explanation is that retailers have been slashing their prices.

Food prices rose by 0.6 per cent in September but prices in non-food stores dropped by 0.7 per cent, with a particularly marked drop in household goods prices.

The price of internet-bought goods fell by a stunning 7.8 per cent.

Those figures suggest that any increase in costs caused by the worldwide food price shock has been balanced out by the falling dollar, which has made online shopping much cheaper and has also brought down the cost of goods built in China, whose yuan is pegged to the US currency.

In addition, poor weather has done its bit to support sales, driving people into the shops just when the winter clothes collections were being put out for the first time.

So retailers are finding a way to profit in a tough environment, because they can pass on cost savings.

But their profits cannot be that strong; retail sales value growth has slowed to a meagre three-monthly rate of just 0.6 per cent.

David Page, of Investec, points out that the gap between the volume and value measures is now at its widest level since the Office for National Statistic's monthly figures began 23 years ago.

A survey by Barclays recently found that 90 per cent of retailers were bullish about the prospects for Christmas. On the basis of today's figures, they should be. But it would be a brave bet to look forward to a strong 2008.

Even if the credit crunch goes no further, it will still have caused significant damage to the financial sector that powers so much of the economy one way or the other. The housing market is not going to do as well in the coming 12 months as it has done over the past year, and that will impact on how wealthy the country's consumers feel.

Shoppers are starting to feel the pinch already, and they will desert the high street if price deflation disappears as swiftly as it has arrived. September may well turn out to be the high water mark for the high street.

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