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(Bloomberg) -- UK retail sales grew more strongly than expected at the start of the year, as otherwise cautious consumers spent more on food to eat at home.
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The volume of goods sold online and in stores increased 1.7% in January, partly erasing a revised 0.6% loss recorded during the festive season in December, the Office for National Statistics said on Friday. The increase last month was the largest since May. Economists had been expecting a 0.5% gain.
The data showed that food sales were the strongest since the start of the pandemic in March 2020, pushing up the overall figure despite decreases in other categories. Specialist stores like butchers and bakers, as well as supermarkets and alcohol and tobacco shops, all reported strong activity thanks to more people eating at home in January.
While the headline figure may help the Labour government counter an overall narrative of economic stagnation, sector-by-sector data suggests consumers remain cautious as they brace for more shocks. Chancellor of the Exchequer Rachel Reeves has been promising to kick start growth after her first budget in October imposed payroll taxes that prompted warnings from top employers that they could be forced to cut jobs.
“The largest monthly rise in UK retail sales since May 2024 comes after a weak performance during the critical festive period,” Bloomberg economist Niraj Shah said in a note. “While that adds to evidence the economy has stabilized, consumers are set to remain cautious about their spending ahead.”
UK retailers and grocery stocks outperformed the broader market in the wake of the data. Traders modestly pared expectations of interest-rate cuts from the Bank of England through this year, pricing just under 50 basis points in total, two basis points less than on Thursday. The pound fell 0.2% to about 1.2650 against the dollar, while gilts were little-changed.
The UK narrowly skirted the threat of a technical recession thanks to a surprise increase in output at the end of 2024. But the latest retail sales data show that Prime Minister Keir Starmer’s Labour government still has cause for concern.
Fears of job losses are overshadowing strong wage growth, encouraging consumers to hold back. Firms are laying off workers at the fastest pace since the financial crisis when excluding the pandemic as cost cuts intensify ahead of the increase in employment taxes, according to S&P Global’s purchasing managers’ index released on Friday.