By Jennifer Ryan Feb. 19 (Bloomberg) -- U.K. retail sales dropped more than twice as much as economists forecast in January as the nation’s winter freeze thwarted spending on items from food to furniture. Sales excluding gasoline fell 1.2 percent from December, the Office for National Statistics said today in London. Economists predicted a 0.5 percent drop, according to the median of 26 forecasts in a Bloomberg News survey. The report uses new methodology in line with European rules. The longest cold snap since 1981 snarled traffic and kept workers home last month just as Chancellor of the Exchequer Alistair Darling raised value-added tax. With jobless claims at the highest since 1997 and the prospect of a government budget squeeze taking hold after the election, weakness in consumer spending may jeopardize the economic recovery. “We had expected some form of retrenchment after we saw the VAT rise and it’s hard to see why households should be out there spending when the unemployment picture is so weak,” Colin Ellis, an economist at Daiwa Capital Markets Europe Ltd. In London and a former Bank of England official, said in a telephone interview. “It’s another reason to be cautious on the pace of recovery.” The pound fell as much as 0.3 percent after the report and traded at $1.5382 as of 9:39 a.m. in London, down 1.4 percent on the day. The yield on the two-year benchmark government bond was up 6 basis points today at 1.189 percent. The January data’s new methodology now includes sales of gasoline and excludes the repair of personal and household goods. The most appropriate comparison with prior figures is the measure that strips out auto fuel, the statistics office said. Electrical Goods The retail drop in January was led by a 2.4 percent decline in sales at food stores, while non-food stores showed no change. Household goods shops reported a 13.4 percent decrease, led by electrical goods, furniture and home repair items, the statistics office said. Including fuels, sales dropped 1.8 percent on the month and rose 0.9 percent from a year earlier. London-based Kingfisher Plc, Europe’s largest home- improvement retailer, said yesterday fourth-quarter sales at stores open at least a year fell 3 percent, hurt by the snowy weather and the rise in VAT. Chief Executive Officer Ian Cheshire said the company’s B&Q stores in Britain ran out of salt used to stabilize snow-covered roads. Snow fell in Britain every day for four weeks, leaving officials to ration road grit and prompting a government investigation into preparations for the cold. At the same time, Darling ended a 2.5 percentage-point cut in value-added tax, withdrawing emergency support for the economy to shore up the public finances. Budget Deficit Britain posted a 4.3 billion-pound ($6.7 billion) budget deficit in January, the first for the month since data began in 1993 as the recession hammered tax receipts. Prime Minister Gordon Brown’s Labour Party and the opposition Conservatives have put the deficit and the economy center stage in their election battle. A YouGov Plc poll for The Sun newspaper that ended Feb. 17 showed the Conservatives with a 9 point lead. Faster price gains may also limit consumer spending. The sales-tax increase pushed the inflation rate to 3.5 percent in January, the highest level in 14 months and enough to require Bank of England Governor Mervyn King to write an open letter of explanation to the Chancellor. The retail sales deflator, a measure of price changes in shops, showed a 0.9 percent annual increase, the statistics office said. To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

Source