Sales fail to lift UK High Street

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Retail sales dropped at their sharpest rate in four years in January, despite heavy discounting in many stores.

Sales fell 1.8% during the month, although they were up 3.3% on the year, the Office for National Statistics (ONS) reported.

Among the worst-hit areas on the High Street were household goods shops and clothing stores.

The weaker January sales came despite prices in stores being on average 0.4% lower than a year ago, the ONS said.

Festive hangover

This is a bad outcome, and one that may eat into GDP growth in the first quarter of 2007 Rob Carnell, ING economist

The drop in sales could knock expectations that the Bank of England will increase interest rates in the coming months, with analysts suggesting that three rate rises since August may be beginning to bite.

Bank policymakers left interest rates on hold at 5.25% last week, following a shock quarter percentage point rise in the previous month in an effort to curb inflation.

The drop in sales in January followed stronger sales in early December and over the key Christmas period.

"If you take the two months together, the outcome is a lot more benign," said UBS economist Amit Kara.

However, ING economist Rob Carnell warned that January's weaker retail sales figure could have a negative effect on UK economic growth in the first three months of the year.

"This is a bad outcome, and one that may eat into GDP growth in the first quarter of 2007," said ING economist Rob Carnell.

The ONS figures contrasted with those from the British Retail Consortium (BRC) which last week suggested High Street sales saw their best performance in January for three years.

Shoppers looking for clearance bargains and demand for healthier foods pushed like-for-like retail sales up 3.1%, the BRC said.