Retail sales soared above all expectations last month while a key gauge of housing confidence slipped to its lowest level in two years. The exceptional high street activity revealed the split personality of consumers, suggesting that they remain unperturbed by the clouds gathering over the housing market and widespread forecasts of an economic slowdown next year.

Deep discounting on retail websites and in nonfood stores lay behind the surprising uplift of 0.6 per cent in sales volumes in September over the previous month, reported yesterday by the Office for National Statistics. Analysts said that poor weather also drove demand for clothes.

Geoffrey Dicks, of RBS, said there had been “a sea-change in high street pricing” since the spring. While food inflation remained fairly high, prices in nonfood stores had tumbled by 3 per cent over the past year, the strongest deflation for 3 years. Internet sales prices sank by a record 7.8 per cent.

As a result, sales volumes rose by 6.3 per cent over the year to September, the highest rate since 2004. But at the same time, figures from the Council of Mortgage Lenders showed that gross mortgage lending rose by a meagre 2.5 per cent in September compared with a year ago - the weakest such growth in more than two years.

The British Bankers’ Association also reported a slowing in underlying mortgage lending to £5.8 billion from £6.1 billion in August. House prices have already started to fall in some areas in response to higher interest rates. The IMF gave warning this week that the market was in danger of following the slump in American house prices, reporting that houses were overpriced by up to 40 per cent.

Surveys show that consumer confidence has also been hit by the run on Northern Rock. The Treasury expects that the sub-prime mortgage crisis will knock GDP growth sharply next year.

Peter Newland, of Lehman Brothers, said: “Strength in the third quarter has in large part been driven by lower prices for consumer goods. Other fundamental factors, such as income growth and interest rates, point to a slowdown in spending in the fourth quarter and into 2008.”

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