Unexpected rise reported for retail sales

Retail sales unexpectedly grew last month, official figures revealed today, as department stores bucked the gloomy trend on the high street.

Retail sales volumes grew by 0.2% month-on-month in March, the Office for National Statistics (ONS) said, against City expectations of a 0.5% decline.

Department stores increased 1.4% month-on-month, the ONS said, while the launch of Apple's iPad 2 and the Nintendo 3DS helped lift sales at computer and telecoms stores.

While food stores reported a 0.7% month-on-month increase in sales volumes, they saw a 0.1% annual decline, as rising food prices are forcing consumers to be more cautious with their spending than they were a year ago.

Economists had expected sales volumes to decline in March following a raft of disappointing company updates and dismal surveys from the likes of the British Retail Consortium (BRC).

Entertainment group HMV, Currys owner Dixons Retail and children's clothing retailer Mothercare all issued profits warnings in March, while wine merchant Oddbins entered administration.

The BRC added to the gloom when its most recent survey revealed that total retail sales were down 1.9% in March - the biggest decline since the start of the trade body's monthly survey in 1995.

So today's figure will come as a surprise to some economists who had feared worse.

Howard Archer, chief UK and European economist, said the increase in sales volumes suggests "the consumer is not quite as flat on his back as had been feared".

However, within the sales data, there were signs of weakness on the high street, as sales volumes in non-food stores fell by 0.3% month on month.

Clothing and household good stores also dropped 0.6% month on month, while other stores, which includes anything from jewellery to bookshops, fell 0.3%.

Mr Archer added that retail sales volumes only rose by 0.3% quarter on quarter in the first quarter of 2011, which suggests consumer spending only made a relatively modest contribution to overall GDP growth. Consumer spending accounts for some 65% of overall GDP.

Consumer spending power suffered its first fall in 30 years in the final quarter of 2010, as wages failed to keep up with high inflation.

Mr Archer said: "Despite the modest rise in retail sales volumes in March, the underlying impression remains that consumers are less able and willing to spend as their purchasing power is squeezed hard by high inflation, muted wage growth and the increasing fiscal squeeze."

There was some welcome respite for the Bank of England as the year-on-year increase in retail prices slowed to 3.4% in March from 4.0% in February.

The Bank is battling with above-target inflation and these figures will suggest retailers are feeling an increasing need to price more competitively to get struggling consumers to spend.

Additional analysts provided by the ONS showed consumers were moving away from large stores - such as supermarkets - to small stores, such as independent butchers and bakers.

Supermarket sale volumes fell by 4.4% over the year to March, while smaller stores increased by 12.3%.

The ONS said the figures suggest consumers are looking to shop more locally, a trend seen over Christmas when the severe weather prevented shoppers from travelling to out-of-town supermarkets.