British retail sales volumes rose by much less than expected in December as a large rise in prices deterred shoppers from splashing out over Christmas, official data showed on Friday.
The Office for National Statistics said retail sales volumes rose 0.3 percent last month, less than a third of the 1.1 percent rise analysts had expected and the weakest for the month of December since 2007.
On the year, sales volumes were up 2.1 percent, also weaker than the 3.0 percent expected and the lowest annual rate for a month of December since 1998.
The pound fell and gilts rose as analysts had expected a strong number on the belief that consumers would bring forward big-ticket purchases before the temporary cut in value added tax was reversed on January 1.
"December's modest rise in UK retail sales is disappointing given the far more upbeat tone of the surveys and trading updates," said Vicky Redwood at Capital Economics.
"They are clearly a timely reminder that, with a fiscal squeeze looming and renewed falls in house prices and employment potentially on the cards, consumers shouldn't be relied on to drive a strong economic recovery."
Bank of England Governor Mervyn King warned earlier this week that consumers face a tough time in the coming years, suggesting he is in little hurry to start tightening policy.
The weakness in sales volumes came as retailers put up their prices at their fastest rate in nine months, by 1.2 percent compared with the same month a year ago. That came after a fall of 0.6 percent in November and followed six months of falling prices.
The figures go some way to explaining the surprisingly sharp rise in consumer price inflation in December and indicate that retailers were keen to rebuild margins after sharp heavy discounting last Christmas, when the recession forced stores to slash prices to shift stock.
Prices in December 2008 fell by 1.8 percent on the year.
"A lot of the comparison is with a year ago, which was very weak," said Alan Clarke, economist at BNP Paribas.
Retail sales values were relatively buoyant, rising 0.9 percent on the month and 3.6 percent on the year — the strongest annual rise for a December since 2006.
The ONS said sales volumes at department stores fell 1 percent on the month, but non-store sales, which include mail order, rose by 2.8 percent in December.
Many British retailers, such as supermarkets Tesco and Sainsbury's and electricals retailer Kesa beat their sales forecasts over the Christmas trading period, possibly helped by consumers bringing forward spending before the reversal of the temporary cut in value added tax at the end of December.
But stores have also warned that 2010 could be a tough year as Britons feel the pinch from pay freezes, government tax hikes and spending cuts.
