U.K. Retail Sales Rise as Stores Cut Prices

U.K. retail sales rose in December as stores offered discounts during the holiday shopping season to lure consumers.

Sales including fuel rose 0.6 percent from November, when they fell a revised 0.5 percent, the Office for National Statistics said today in London. The December increase matched the median forecast of 21 economists in a Bloomberg News survey. From a year earlier, sales were up 2.6 percent.

The gain in consumer demand may not be maintained as U.K. unemployment rises, inflation outpaces wage growth and consumer confidence falls. With the euro-area crisis damping export demand, that’s deepening fears Britain is heading for a another recession.

“Sales were driven mainly by heaving discounting of shops in the run up to Christmas,” Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam, said before the announcement. “But I think that will be as good as it will gets, especially as the weak labor-market conditions will weigh on the consumer spending.”

The pound remained lower against the dollar after the report and traded at $1.5467 as of 9:34 a.m. in London. It was down 0.1 percent from yesterday.

Clothing Sales

The monthly increase was led by clothing sales, which rose 1.8 percent, and the other stores category, which includes computers and telecommunications equipment and increased 2.5 percent. Excluding fuel, retail sales rose 0.6 percent in December from November and increased 1.7 percent from a year earlier.

In the three months through December, retail sales increased 1.1 percent, the biggest quarterly gain since the quarter through August 2010. From a year earlier, three-month sales were up 1.4 percent.

Britain’s unemployment rate rose to 8.4 percent, the highest since January 1996 in the three months through November. An index of consumer sentiment fell to 38 from 40 in November, Nationwide Building Society said yesterday. That’s close to the record-low 36 reached in October.

Retailers such as Tesco Plc (TSCO) and Marks & Spencer Group Plc have had to reduce prices to lure shoppers in what they say is a “challenging” environment. Tesco, the U.K.’s largest food retailer, cut profit expectations this month after lower than expected sales.

The statistics office said the retail sales deflator, a measure of changes in shop prices, fell to 2.4 percent in December, the lowest in 16 months, from 3.6 percent in November. The deflator on food sales was the lowest since March. Excluding auto fuel, the deflator slipped to 1.8 percent from 2.6 percent.

Stimulus Expansion

While the U.K. economy grew at the fastest pace in a year in the third quarter, the Bank of England has said expansion will weaken in the following quarters. The central bank is in the final month of a 75 billion-pound ($116 billion) round of bond purchases to boost growth, and economists at Citigroup Inc. and Nomura International Plc expect a further expansion of stimulus next month.

The Bank of England has also forecast a “sharp” easing of inflation, which it says will ease the squeeze on consumers this year.

“Even if inflation drops it will remain slightly higher than wage growth, especially in the near term,” Beaumont said. “Although we see inflation coming down sharply, which of course will underpin consumption growth, for now I think the labor market is the dominate factor.”