Retail sales in the UK rose for the first time in five months, providing a stronger-than-expected start to the year despite ongoing economic challenges. Sales volumes increased by 1.7% in January, reversing a 0.6% decline in December, according to data from the Office for National Statistics (ONS). This was the biggest monthly rise since May last year and significantly outpaced economists' forecasts of around 0.5% growth.
Food store sales led the recovery, jumping 5.6%, the sharpest increase since March 2020, as more people opted to eat at home rather than dining out. Supermarkets, alcohol and tobacco shops, and specialist food stores such as butchers and bakers all reported strong trading. In contrast, clothing retailers and household goods stores struggled, with sales falling 1.3% over the month.
Consumer Caution and Economic Headwinds
Despite the boost in January sales, overall consumption remains fragile. Over the past three months, retail sales volumes have declined by 0.6%, reflecting the weakness at the end of last year. Sales remain 1.3% below pre-pandemic levels, highlighting the broader economic stagnation.
While consumer confidence showed slight improvement—partly driven by interest rate cuts from the Bank of England (BoE)—it remains historically low. Inflation rose unexpectedly to 3.0% in January from 2.5% in December, complicating the outlook for spending. Analysts suggest that stagnant employment growth and rising inflation could offset the benefits of lower interest rates, keeping household budgets under pressure.
Retail Sector Outlook and Market Reactions
Retailers anticipate a challenging year ahead, with concerns over employer tax increases and their impact on pricing and employment. Major supermarket chains have already announced job cuts, reflecting cost pressures despite stronger food sales.
The Bank of England cut interest rates for the third time in six months, lowering them to 4.5% from 4.75%, and is expected to continue easing policy throughout the year. Some analysts predict rates could fall to 3.75%, making borrowing cheaper and potentially encouraging more consumer spending.
Online retail spending fell by 1.7% in January, bringing the share of e-commerce in total retail sales down to 25.7% from 26.9%. Meanwhile, the British pound remained relatively stable against the dollar following the retail sales release.
Looking Ahead
Although January’s retail performance exceeded expectations, the broader economic landscape remains uncertain. The UK economy has registered minimal growth since March 2024, leading the BoE to halve its GDP growth forecast for 2025 to 0.75% from 1.5%.
With inflation still above target and consumer sentiment subdued, the retail sector faces a delicate balance between encouraging spending and navigating persistent cost pressures. Analysts believe further BoE rate cuts could help stimulate demand, but the extent of the recovery will depend on broader economic stability and wage growth in the months ahead.