Retail sales returned to growth in the run-up to Christmas but businesses were forced to slash prices to bring in cash-strapped consumers, official figures revealed today..
The 0.6% rise in sales volumes last month, which followed a 0.5% drop in November, was driven by clothing chains and department stores, and came as store-price inflation, the rate at which prices rise, fell to its lowest level for 16 months, from 3.6% to 2.4%.
Some economists said while December's figures suggest the wider economy may have avoided contraction in the final three months of the year, the sector is likely to face significant pressure this year and should brace itself for a "New Year hangover".
Elsewhere, the value of retail sales grew 0.8% month-on-month and 6.2% year-on-year, but the ONS warned figures for December 2010 were distorted by the harsh winter weather.
The figures, released by the Office for National Statistics (ONS), come against a mixed backdrop in the retail sector, as major players like John Lewis, House of Fraser and Superdry owner SuperGroup put in a robust performance while others such as Peacocks and Blacks Leisure fell into administration.
The broad picture of December revealed a last-minute rush in the week running up to Christmas Day, with many retailers reporting a surge in sales in the final few days.
Profit margins across the entire retail industry have been hit by price drops, heaping further pressure on those retailers struggling to stay afloat.
Supermarkets have been embroiled in an aggressive price war while many high-street firms brought forward their end-of-year sales to pull in more customers.
Chris Williamson, chief economist at financial services information company Markit, said: "The big question is how big the New Year hangover will be as households retrench from the Christmas mini-spending spree."
Consumers spent £42.1 billion in the retail sector in December, compared to £29 billion the previous month and £39 billion the previous year, the ONS said.
Some 10.9% of all retail sales were made online, totalling £837.1 million, compared to 9.1% in December 2010.
Clothing and footwear stores saw volumes grow 1.8% month-on-month and 6.3% year-on-year while department stores, such as John Lewis, recorded 1.2% monthly growth.
Elsewhere, food store sales saw weaker growth, with volumes increasing month-on-month by 0.4% and 1.2% year-on-year.
There was evidence that spending on big-ticket items was still being held back as sales at household goods stores fell by 2.4% month-on-month, the biggest drop since April 2010.
Howard Archer, chief UK and European economist at IHS Global Insight, said December's figures boosted hopes that the total economy avoided contraction in the fourth quarter of 2011. The official figures for gross domestic product (GDP) between September and December will be released on Wednesday.
But he warned: "The risk remains that pressurised and worried consumers will put away their purses and wallets, and hunker down for an extended period after a late flurry of spending in the run-up to Christmas and then taking advantage of the best of the bargains in the clearance sales."