Retail sales growth slowed as expected last month but the impact from a rise in sales tax at the start of the month was partly offset by widespread discounting, a survey by the Confederation of British Industry showed.
However, retailers expect the next few months to be tough as household finances come under pressure from the value added tax rise and muted wage growth.
The CBI distributive trades survey's reported sales balance fell to +37 in January from +56 in December, which was an 8-1/2 year high. Analysts had forecast a fall to +35.
"The lure of seasonal sales and price discounting may have helped mitigate some of the impact of the VAT increase on volumes, however, retailers expect the pace of sales growth to slow further next month and orders placed with suppliers have flattened out," said CBI chief economic advisor Ian McCafferty.
The expected sales balance for February fell to +25 -- its lowest since July.
"Consumer demand is expected to be weak in the coming months, as the spending power of households is hit by a combination of sharply rising prices and weak wage growth," he said.
The CBI said there was a particularly sharp fall in durable goods, while the strongest sales growth was reported by grocers, clothing and footwear stores.
Rising taxes, big public spending cuts and pressure on household income from high inflation are expected to dent consumer demand in 2011.
Value added tax rose to 20 per cent from 17.5 per cent on 4 January, while the national insurance payroll tax is due to rise in April.
Official data released last week showed that cold weather and high inflation combined to give British retailers their worst December on record.