British retail sales volumes fell unexpectedly in October as stretched consumers stayed at home, official data showed on Friday, in a new warning sign for the economy.

Retail sales volumes dropped 0.3 per cent month-on-month, following a revised 1.1 per cent decline in September that was worse than first estimated, the Office for National Statistics (ONS) said.

Economists polled by Reuters had forecast that sales volumes would rise by 0.3 per cent on the month in October.

Overall the figures fitted with the darkening outlook for Britain’s economy, with economic growth stagnant and strong price pressures now fading, albeit slowly.

Investors think these factors will force the Bank of England to lower interest rates next year.

“Retailers suggested that cost of living, reduced footfall and the wet weather in the second half of the month contributed to the fall,” the ONS said.

Excluding petrol, sales volumes fell 0.1 per cent fall on the month. The figures also showed a downward revision for sales during the third quarter.

“The impact of higher interest rates is building,” said Martin Beck, chief economic adviser to the EY ITEM Club consultancy.

“But retailers aren’t out of supports. In the short-term, October’s drag from weaker fuel sales may reverse as recent falls in oil prices feed through to lower pump prices,” Beck said.

Given the fine margin by which Britain avoided an economic contraction during the third quarter, Friday’s figures showed a risk that GDP could yet be revised lower to a negative reading.

Compared with last year, retail sales were 2.7 per cent lower - a worse outcome than any of the economists polled by Reuters had forecast.

Retail sales volumes have fallen back to 2018 levels. Still, retailers hope the crucial Christmas trading period will yield better times.

Despite recent downbeat economic data and consumer surveys, major retailers including Tesco, Sainsbury’s, Next, Primark and Marks &Spencer have sounded confident about their prospects in the run-up to Christmas.

Meanwhile the pound weakened on Friday after data showed that British retail sales unexpectedly fell in October, as cash-strapped consumers stayed at home, stirring up investor concern about the resilience of household spending power. Retail sales volumes dropped 0.3 per cent month-on-month, following a revised 1.1 per cent decline in September that was worse than first estimated, the Office for National Statistics said.

Economists polled by Reuters had forecast sales volumes would rise by 0.3 per cent on the month in October.

Sterling was heading for a 1.3 per cent rise against the dollar this week, largely as a result of US inflation data that suggested there is no need for the Federal Reserve to raise rates again any time soon.

Against the euro, which can offer a cleaner read on sentiment towards the pound, it has made little headway on a weekly basis, up just 0.1%, having dropped for three straight days against the single European currency.

Behind the softness is a reassessment by investors of the outlook for UK interest rates. Futures markets show traders expect interest rates to fall by around 80 basis points by the end of 2024 from 5.25 per cent currently, compared with a decline of just over 50 bps a week ago.

“The decline in retail sales and the drop in the value of the pound show that the UK economy is struggling. People are feeling the effects of the high cost of living, which is causing them to spend less money,” IG analyst Jeremy Naylor said. Sterling was last down 0.1 per cent on the day at $1.24, while the euro was up 0.2 per cent against the pound at 87.55 pence.

“The dovish repricing of BoE policy expectations has contributed to the pound underperforming modestly over the past week. It has resulted in EUR/GBP climbing to a fresh high yesterday of 0.8766 as it moves further above support from the 200-day moving average at around 0.8685,” strategists at MUFG said.

Separate releases this week have painted a mixed picture, as a welcome slowdown in UK inflation and robust wage growth suggest consumers are in a good place heading into the key holiday season shopping period.

But cracks are starting to appear elsewhere, according to various data points this week. The economy avoided falling into recession in the third quarter of this year, but failed to grow.

House prices staged their first annual fall since April 2012 in the year to September, while private rents soared - a sign lofty mortgage rates are turning would-be homeowners into tenants.

Another government report showed business insolvencies in England and Wales rose 18% in annual terms in October, under pressure from rising interest rates and a steep increase in the cost of energy, for example.