Further pressure was piled on Rachel Reeves today with figures showing retail sales unexpectedly contracted in December.

The volume of goods bought fell 0.3% following a 0.1% rise in November, the Office for National Statistics said, as analysts said it could shorten the odds on an interest rate cut next month.

A Reuters poll of economists showed expectations of a 0.4% expansion. The December figure meant that in the final ‘golden quarter’ sales volumes fell 0.8% compared with the previous three months.

Declines in supermarkets were partly offset by a rise in non-food stores, such as clothing retailers, which rebounded from falls in recent months, the ONS said.

ONS senior statistician Hannah Finselbach said December’s retail fall “was driven by a very poor month for food sales, which sank to their lowest level since 2013, with supermarkets particularly affected”.

She added: “With the timing of Black Friday falling within these latest data, our figures when not adjusted for seasonal spending show overall retail sales grew more strongly than in recent Decembers.”

The Chancellor is also under fire over tax and wage rises that will add substantially to retailers’ costs in April.

Charlie Huggins, manager of the Quality Shares Portfolio at Wealth Club, commented: “Most retailers make lower profit margins online and their stores have high fixed costs, which are set to rise again in April following the Autumn Budget. Without higher revenues in store to offset these costs, profitability across the sector is likely to come under pressure.”

Kris Hamer, director of Insight at the British Retail Consortium, said: “With retailers doing all they can to absorb existing costs, two-thirds of CFOs report they are left with little choice but to increase prices, and reduce investment in jobs and shops. 

“To mitigate this, Government must ensure that its proposed business rates reform does not result in any shop paying higher rates than they already do.”

Prem Raja, head of trading floor at Currencies 4 You, commented: “A bigger cut in interest rates is now a possibility.

“This morning’s retail sales show that there is a real lack of consumer confidence in the UK with spending so low. I think the MPC have no choice but to cut interest rates in February. The only question is will a 0.25% cut be enough, or will they have to go for a 0.5% reduction?”

David Belle, founder and trader at Fink Money, was more scathing about the Chancellor’s policies.

“This data is unequivocal proof that Reeves’ policies are decimating the consumer,” he said. “This is especially the case when you consider November was downgraded, too. I am unsure as to whether a rate cut would be enough for Reeves leading into the new fiscal year.”

The figures followed GDP data on Thursday, which showed the economy grew by only 0.1% in November, short of analysts’ expectations.

Better news was contained in inflation data which showed an unexpected decline to 2.5% in December from 2.6% in the previous month.

The pound weakened on the back of the data, falling 0.5% against the dollar to $1.218.

DFS improves

Furniture retailer DFS has reported an improved performance in the first half of its financial year after it benefited from gains in market share lower operating costs and gross margin improvement.

In the 26 weeks to 29 December, group order intake was up 10.1% with its Sofology brand achieving an increase of 19.1%.

Meanwhile, first half pre-tax profit is expected to come in at around £16 million to £17m, a £7m to £8m uplift on the prior year.

It said it continues to expect full year pre-tax profit to be in line with current expectations, although profit delivery is now likely to be weighted to the first half due to the UK’s economic performance post budget.

The company also cited forthcoming increases in second half operational costs resulting from the upcoming rises in national insurance contributions, and the national living wage, as well as higher than anticipated interest rates.

Chief executive Tim Stacey said: “We remain focused on executing our plan, and are cautiously optimistic despite the increased inflationary pressures and less positive market outlook for 2025.

“Looking forward, we are confident that the group is well positioned to drive attractive returns for shareholders as the market recovers and we remain focused on delivering our 8% PBT medium-term target.”