A shock fall in retail sales last month has cast doubt on the analysis of the Bank of England, which yesterday predicted renewed consumer confidence would support economic growth this year.

The Office of National Statistics reported that seasonally adjusted retail sales fell by 1.3 per cent in January compared with the previous month, the first decline since July last year, and the biggest fall since December 2004 when sales slumped by 1.8 per cent.

The statistics office said sales volumes fell in all sectors except non-store retailing, which was flat on the month. Household goods stores showed the largest decrease, with sales 3.0 per cent lower following an unusually strong December.

Yesterday the Bank of England published its quarterly Inflation Report in which it confounded City expectations by predicting a strong recovery in economic growth supported by a pick-up in consumer spending.

The Bank said big gains in shares prices and a recovery in the housing market would underpin spending, taking GDP growth to above its historic average by the end of the year.

But a substantial number of economists question this analysis, instead believing that growth will remain subdued. Today's officiial retail data add further weight to their argument.

"This is a really stunning retreat in retail sales," Howard Archer, chief UK economist at Global Insight, said. "It reinforces our belief that the Bank of England is too optimistic about consumer spending."

He added: "Furthermore, the decline in sales occurred even though a 1.2 per cent year-on-year decline in prices indicates that retailers continued to strongly discount to encourage consumers to keep spending."

Mr Archer said that a number of factors including rising unemployment, higher taxes and increasing utility bills would combine to subdue spending over the coming months resulting in further below-trend growth.

But John Butler, chief UK economist at HSBC, voiced a note of caution, saying that month-to-month movements in sales at this time of the year could be "incredibly volatile". He added that today's figures did introduce a "seed of doubt" as to whether consumer spending would recover to the extent the Bank has predicted.

"With households seeing employment fall and disposable income squeezed, it is far from clear in our view that the weak consumer environment has passed," he said. "The February retail sales number will be incredibly important."

Last week the Bank of England ignored the pleas of retailers by leaving interest rates unchanged at 4.5 per cent for the sixth month running. The Bank has been reluctant to reduce the cost of borrowing despite five consecutive quarters of below-trend growth on fears that a year of soaring fuel costs might trigger an inflationary spiral with wages and prices both rising.

Kevin Hawkins, the director-general of the British Retail Consortium, said: "After the pre-Christmas upturn, we are now back to the reality of a tough, discount-driven retail market. The message from every sector of our industry is the same. The squeeze on consumer spending continues unabated. The economy badly needs a cut in interest rates."

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