The pound plummeted today after retail sales figures were much weaker than analysts expected.
Sterling fell 0.47 per cent to 1.2284 against the US dollar.
Sales in December fell by 1.9 per cent month-on-month – the largest monthly fall since May 2011 – which was considerably more than the 0.1 per cent drop analysts predicted, Martin Beck, senior economic advisor at EY said.
All retail sectors experienced a monthly drop, with sales in clothing, footwear and household goods falling the most.
This hampered sales in the fourth quarter, official data showed. However, sales grew in the period overall, rising 1.2 per cent quarter-on-quarter over the three-month quarter from October to December.
Kate Davies, Office for National Statistics (ONS) senior statistician, said it was a strong end to 2016.
Despite the fact that month-on-month sales figures can be volatile, some analysts are pointing to difficult times ahead.
"Headwinds from the Brexit vote may begin to blow a little harder," said Kallum Pickering, senior UK economist at Berenberg. Gains in incomes and rising employment helped consumption grow above trend over the past two years, but now that will change.
"We expect real consumption growth to slow from an average rate of 2.6 per cent year-on-year in 2015 and 2016 to 1.7 per cent in 2017 and 2018 as real wage gains are eroded by rising inflation (2.5 per cent in 2017 and 2.4 per cent in 2018)," he said.
"Slowing job gains now that the labour market has reached full employment could further reduce demand momentum."
Paul Sirani, chief market analyst at Xtrade, said the retail sector is bearing the brunt of soaring prices and the depreciating pound.
“The combination of these two factors looks set to pile even more misery upon consumers, painting a gloomy outlook for growth in 2017.”
Prices are headed up
Average store prices increased by 0.9 per cent compared with December 2015 – the largest year-on-year increase since December 2013, and the fifth consecutive month of increases.
Prices have been up recently for all retailing as a result of price rises at petrol stations, the ONS report said. But prices are now increasing in other types of stores, which may have contributed to the monthly fall in December sales.