However the impression of a poor Christmas on the high street was disputed by the Retail Consortium, which represents more than 90 per cent of shops.
The Central Statistical Office (CSO) said the volume of sales fell by 0.7 per cent during the month, after seasonal adjustments, in sharp contrast with market expectations of a brisk Christmas.
The pound fell as hopes resurfaced that the Chancellor would sanction a further cut in interest rates around the time of the Budget on 16 March, closing 1.55 pfennigs down at DM2.4776.
But the Retail Consortium reported a more robust Christmas than the official figures suggested. City analysts said the CSO may have overcompensated for the usual surge in sales in December.
The consortium, which does not produce monthly figures adjusted for seasonal effects, said the volume of sales rose by 2 per cent over levels achieved a year ago, compared with a 1.2 per cent rise cited by the CSO.
In view of recent reports of robust sales at Christmas, the Treasury was puzzled by yesterday's figures and warned against attaching too much weight to them.
Hugh Clark, a director of the Retail Consortium, said: 'After a weak start, December sales were better than expected, benefiting from the impact of two extra pre- Christmas trading days and hectic post-Christmas trading. The strong sales pattern has continued into the new year.'
But he warned that sales levels were achieved by promotions and very deep price cuts after Christmas. Price rises, which could stall a consumer recovery, should be expected in the weeks to come.
In the latest three months, usually a more reliable guide to the trend, the official figures showed that sales by department stores rose by 2.3 per cent, possibly reflecting consumers' increasingly voracious appetite for bargains.
But the important small store sector, which includes jewellers, newsagents, chemists, tobacconists and stationers, who are less able to offer discounts, fared badly - sales sinking by 4 per cent. In the three months to December, the volume of food sales grew by 1.4 per cent and clothing and footwear fell by 1 per cent. Sales of household goods increased by 1 per cent, possibly reflecting price cuts.
Today's figures for December unemployment and industrial output for November may further highlight the weakness of the economy and strengthen the case for lower interest rates. Unemployment is expected to climb to more than 3 million.
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