Discounts help retailers enjoy best January for three years

Bargain-hunting shoppers flocked to the high street in droves last month, ensuring retailers had the best January sales period for three years, according to a report from the British Retail Consortium (BRC).

Fresh from celebrating a bumper Christmas, retailers enjoyed a further acceleration in sales growth in January, the BRC said. Like-for-like sales, which strip out new store openings, were 3.1 per cent higher than a year earlier, up from 2.5 per cent in December.

The star performer was the grocery sector, which saw the strongest sales growth since July's heatwave. New Year's resolutions and healthy-eating promotions benefited sales of fresh fruit, vegetables, salads and poultry, and there were good gains for premium and organic lines. Clothing sales were down with the mild weather making coats and jumpers hard to shift.

The news that consumers are still splashing out despite higher interest rates will raise fears at the Bank of England that its monetary medicine is not working. However, the BRC played down the strong numbers, which chime with last week's CBI retailing survey, and urged the Bank's Monetary Policy Committee to peg rates at 5.25 per cent when it meets this week.

"Much of the growth has been driven by the grocery sector and discounting has been fairly widespread in several other categories," said Kevin Hawkins, the BRC's director general. "The comparatives from last year are weak and the November and January interest rate increases have yet to make themselves felt. No one should start clamouring for another rate rise on the basis of these figures."

A separate report showed the first tentative signs that higher rates are hitting the rest of the services sector. The CIPS/RBS purchasing managers' index - which covers services ranging from banking to hairdressing, but excludes retailing - dropped back to 59.2 in January from December's nine-year high of 60.6. Although still well above the 50 "no change" level, it was the first fall since August.

The report also revealed that price pressures within the sector are building. "Panellists generally linked the latest rise in average overheads to higher wage bills, although there were also reports that increased raw material prices had resulted in a rise in input costs," the report said. "Inflation of average output prices was the fastest since August 2006 and the second strongest in over six years. Rate hawks will note the rise in output prices as a further sign of inflationary pressures," said Andrew McLaughlin, the RBS group chief economist.